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W. R. Berkley Corporation's (NYSE:WRB) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

·4 min read

With its stock down 10.0% over the past three months, it is easy to disregard W. R. Berkley (NYSE:WRB). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to W. R. Berkley's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for W. R. Berkley

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for W. R. Berkley is:

20% = US$1.4b ÷ US$6.9b (Based on the trailing twelve months to March 2022).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.20 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of W. R. Berkley's Earnings Growth And 20% ROE

To begin with, W. R. Berkley seems to have a respectable ROE. On comparing with the average industry ROE of 12% the company's ROE looks pretty remarkable. This certainly adds some context to W. R. Berkley's decent 12% net income growth seen over the past five years.

Next, on comparing W. R. Berkley's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 14% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is WRB fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is W. R. Berkley Using Its Retained Earnings Effectively?

In W. R. Berkley's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 12% (or a retention ratio of 88%), which suggests that the company is investing most of its profits to grow its business.

Additionally, W. R. Berkley has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 35% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 16%) over the same period.

Summary

Overall, we are quite pleased with W. R. Berkley's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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