Are Strong Financial Prospects The Force That Is Driving The Momentum In Zurich Insurance Group AG's VTX:ZURN) Stock?

Zurich Insurance Group's (VTX:ZURN) stock is up by a considerable 15% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Zurich Insurance Group's ROE today.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Zurich Insurance Group

How Is ROE Calculated?

ROE 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 Zurich Insurance Group is:

10% = US$3.5b ÷ US$35b (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. That means that for every CHF1 worth of shareholders' equity, the company generated CHF0.10 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Zurich Insurance Group's Earnings Growth And 10% ROE

To start with, Zurich Insurance Group's ROE looks acceptable. On comparing with the average industry ROE of 7.2% the company's ROE looks pretty remarkable. This certainly adds some context to Zurich Insurance Group's decent 11% net income growth seen over the past five years.

As a next step, we compared Zurich Insurance Group's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 6.1%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is ZURN worth today? The intrinsic value infographic in our free research report helps visualize whether ZURN is currently mispriced by the market.

Is Zurich Insurance Group Efficiently Re-investing Its Profits?

Zurich Insurance Group has a significant three-year median payout ratio of 81%, meaning that it is left with only 19% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Moreover, Zurich Insurance Group 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 79%. Still, forecasts suggest that Zurich Insurance Group's future ROE will rise to 15% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we feel that Zurich Insurance Group's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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. 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.
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