Old Republic International (NYSE:ORI) had a difficult month with its share price down 6.0%. 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.
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.
Check out our latest analysis for Old Republic International
How do you calculate return on equity?
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).
“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 $0.22 in profit.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Old Republic International’s earnings growth and 22% ROE
First, we recognize that Old Republic International has a significantly high ROE. Additionally, the company’s ROE is above the industry average of 11%, which is quite remarkable. As a result, Old Republic International’s exceptional 25% net income growth over the past five years comes as no surprise.
As a next step, we benchmarked Old Republic International’s net income growth against the industry, and fortunately, we found that the growth the company saw was above the industry average growth of 13%. .
Earnings growth is an important factor in stock valuation. 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 valuation, check out this indicator of its price-earnings ratio, relative to its sector.
Does Old Republic International use its profits effectively?
Old Republic International’s three-year median payout ratio is a fairly moderate 32%, meaning the company retains 68% of its revenue. So it looks like Old Republic International is effectively reinvesting to see impressive earnings growth (discussed above) and paying a well-covered dividend.
Also, Old Republic International has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio is expected to reach 55% over the next three years.
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. 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.
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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.