Is Weakness In Zurich Insurance Group AG (VTX:ZURN) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 4.6% over the past month, it is easy to disregard Zurich Insurance Group (VTX:ZURN). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Zurich Insurance Group's ROE in this article.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Zurich Insurance Group

How To Calculate Return On Equity?

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:

18% = US$4.7b ÷ US$26b (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CHF1 worth of equity, the company was able to earn CHF0.18 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Zurich Insurance Group's Earnings Growth And 18% ROE

At first glance, Zurich Insurance Group seems to have a decent ROE. On comparing with the average industry ROE of 10% the company's ROE looks pretty remarkable. Despite this, Zurich Insurance Group's five year net income growth was quite low averaging at only 4.9%. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.

We then compared Zurich Insurance Group's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 2.3% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Zurich Insurance Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zurich Insurance Group Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 77% (or a retention ratio of 23%), most of Zurich Insurance Group's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Additionally, Zurich Insurance Group has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 77%. However, Zurich Insurance Group's ROE is predicted to rise to 23% despite there being no anticipated change in its payout ratio.

Conclusion

On the whole, we feel that Zurich Insurance Group's performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.