Will weakness in shares of Old Republic International Corporation (NYSE:ORI) prove temporary given strong fundamentals?

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With its stock down 9.9% over the past three months, it’s easy to overlook Old Republic International (NYSE:ORI). 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. In this article, we decided to focus on the ROE of Old Republic International.

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 short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

Check out our latest analysis for Old Republic International

How to calculate return on equity?

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).

“Yield” refers to a company’s earnings over the past year. So, this means that for every $1 of investment by its shareholder, the company generates a profit of $0.20.

Why is ROE important for earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

A side-by-side comparison of Old Republic International’s 20% earnings and ROE growth

For starters, Old Republic International’s ROE seems acceptable. Especially when compared to the industry average of 12%, the company’s ROE looks pretty impressive. Probably because of this, Old Republic International has been able to see an impressive net income growth of 26% over the past five years. However, there could also be other causes behind this growth. Such as – high revenue retention or effective management in place.

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%. .

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. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. If you’re wondering about Old Republic International’s valuation, check out this indicator of its price-earnings ratio, relative to its industry.

Does Old Republic International use its retained earnings effectively?

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. 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.

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.

Conclusion

Overall, we believe Old Republic International’s performance has been quite good. 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. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

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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