Could the market be wrong about Old Republic International Corporation (NYSE:ORI) given its attractive financial outlook?

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It’s hard to get excited after watching the recent performance of Old Republic International (NYSE:ORI), as its stock is down 9.4% in the past three months. However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. Specifically, we decided to study the ROE of Old Republic International in this article.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simple terms, it is used to assess the profitability of a company in relation to its equity.

How is ROE calculated?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Old Republic International is:

20% = US$1.3 billion ÷ US$6.8 billion (based on trailing 12 months to March 2022).

The “yield” is the profit of the last twelve months. This means that for every dollar of shareholders’ equity, the company generated $0.20 in profit.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective earnings-generating indicator for a company’s future earnings. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Earnings growth and ROE of 20% from Old Republic International

At first glance, Old Republic International seems to have a decent ROE. Especially when compared to the industry average of 12%, the company’s ROE looks pretty impressive. This likely laid the foundation for Old Republic International’s significant 26% net income growth over the past five years. We believe there could be other factors at play here as well. For example, the business has a low payout ratio or is efficiently managed.

We then compared Old Republic International’s net income growth with the industry and we are pleased to see that the company’s growth figure is higher compared to the industry which has a growth rate of 14 % over the same period.

NYSE:ORI Past Earnings Growth July 19, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So you might want check if Old Republic International is trading on a high P/E or a low P/Ein relation to its industry.

Does Old Republic International use its retained earnings effectively?

Old Republic International’s three-year median payout ratio is a rather moderate 30%, meaning the company retains 70% of its revenue. On the face of it, the dividend is well covered and Old Republic International is effectively reinvesting its earnings, as evidenced by its exceptional growth discussed above.

Additionally, Old Republic International is committed to continuing to share its profits with shareholders, which we infer from its long history of paying dividends for at least ten years.

Conclusion

Overall, we are quite satisfied with the performance of Old Republic International. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive earnings growth. That said, in studying the latest analyst forecasts, we found that while the company has seen growth in past earnings, analysts expect future earnings to decline. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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