Great-West Lifeco Inc.'s (TSE:GWO) Stock Is Going Strong: Have Financials A Role To Play?

Most readers would already be aware that Great-West Lifeco's (TSE:GWO) stock increased significantly by 14% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Great-West Lifeco's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Great-West Lifeco

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Great-West Lifeco is:

12% = CA$3.8b ÷ CA$31b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Great-West Lifeco's Earnings Growth And 12% ROE

To begin with, Great-West Lifeco seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 14%. This certainly adds some context to Great-West Lifeco's moderate 6.1% net income growth seen over the past five years.

As a next step, we compared Great-West Lifeco's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 15% in the same period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Great-West Lifeco's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Great-West Lifeco Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 54% (or a retention ratio of 46%) for Great-West Lifeco suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Great-West Lifeco is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 53% of its profits over the next three years. Still, forecasts suggest that Great-West Lifeco's future ROE will rise to 17% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we feel that Great-West Lifeco certainly does have some positive factors to consider. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.