Does the recent performance of Old Republic International Corporation (NYSE:ORI) stock reflect its financial health?

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Shares of Old Republic International (NYSE:ORI) are up 4.0% over the past month. Given its impressive performance, we decided to study the company’s key financial indicators, as a company’s long-term fundamentals usually dictate market outcomes. In particular, we will be paying attention to Old Republic International’s ROE today.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

How is ROE calculated?

Return on equity 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:

22% = US$1.5 billion ÷ US$6.9 billion (based on trailing 12 months to December 2021).

The “yield” is the profit of the last twelve months. Another way to think about this is that for every dollar of equity, the company was able to make $0.22 in profit.

What does ROE have to do with earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. 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 22% ROE at Old Republic International

First, we appreciate that Old Republic International has an impressive ROE. Second, even when compared to the industry average of 11%, the company’s ROE is quite impressive. Thus, the substantial 25% net income growth observed by Old Republic International over the past five years is not too surprising.

We then compared the growth of Old Republic International’s net income with the industry and we are happy to see that the growth figure for the company is higher compared to the industry which has a growth rate of 12 % over the same period.

NYSE:ORI Past Earnings Growth February 10, 2022

Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the action is placed for a bright or bleak future. Is Old Republic International correctly valued compared to other companies? these 3 recovery measures might help you decide.

Does Old Republic International effectively reinvest its profits?

Old Republic International has a three-year median payout ratio of 32% (where it keeps 68% of its revenue), which is neither too low nor too high. 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 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. After studying the latest analyst consensus data, we found that the company’s future payout ratio is expected to reach 55% over the next three years. Therefore, the higher expected payout ratio explains the decline in the company’s expected ROE (to 10.0%) over the same period.

Summary

Overall, we are quite satisfied with the performance of Old Republic International. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. That said, in studying current analyst estimates, we were concerned that while the company has increased earnings in the past, analysts expect earnings to decline in the future. 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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