Could the market be wrong about the stock?

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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 12% in the past three months. But if you pay close attention, you might realize that its strong financials could mean the stock could potentially see a long-term rise in value, as the markets generally reward companies in good financial shape. More specifically, we decided to study Old Republic International RE in this article.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

See our latest analysis for Old Republic International

How to calculate return on equity?

the return on equity formula is:

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).

“Yield” is the income the business has earned over the past year. Another way to think about this is that for every dollar of equity, the company was able to make a profit of $0.20.

What is the relationship between ROE and earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. 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. Compared to the industry average ROE of 13%, the company’s ROE looks quite remarkable. Probably because of this, Old Republic International has been able to see an impressive net income growth of 26% over the past five years. We believe there could be other factors at play here as well. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.

As a next step, we benchmarked Old Republic International’s net income growth against the industry, and fortunately found that the growth the company saw was above the industry average growth of 14%. .

past earnings-growth

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about Old Republic International’s assessment, check out this gauge of its price/earnings ratioin relation to its industry.

Does Old Republic International effectively reinvest its profits?

Old Republic International has a three-year median payout ratio of 30% (where it keeps 70% of its revenue), which is neither too low nor too high. So it looks like Old Republic International is effectively reinvesting to see impressive earnings growth (discussed above) and paying a well-covered dividend.

Additionally, Old Republic International has paid dividends over a period of at least ten years, which means the company is pretty serious about sharing its profits with its shareholders.

Summary

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. However, according to the latest forecasts from industry analysts, the company’s earnings are likely to decline in the future. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

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.

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