Can Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München's (ETR:MUV2) Weak Financials Pull The Plug On The Stock's Current Momentum On Its Share Price?

Münchener Rückversicherungs-Gesellschaft in München's (ETR:MUV2) stock is up by a considerable 12% over the past three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Specifically, we decided to study Münchener Rückversicherungs-Gesellschaft in München's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Münchener Rückversicherungs-Gesellschaft in München

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Münchener Rückversicherungs-Gesellschaft in München is:

4.1% = €1.2b ÷ €30b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.04 in profit.

What Has ROE Got To Do With 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 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 Münchener Rückversicherungs-Gesellschaft in München's Earnings Growth And 4.1% ROE

When you first look at it, Münchener Rückversicherungs-Gesellschaft in München's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 7.5%, the company's ROE leaves us feeling even less enthusiastic. For this reason, Münchener Rückversicherungs-Gesellschaft in München's five year net income decline of 7.8% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

That being said, we compared Münchener Rückversicherungs-Gesellschaft in München's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 0.3% 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Münchener Rückversicherungs-Gesellschaft in München's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Münchener Rückversicherungs-Gesellschaft in München Using Its Retained Earnings Effectively?

Münchener Rückversicherungs-Gesellschaft in München's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 64% (or a retention ratio of 36%). With only very little left to reinvest into the business, growth in earnings is far from likely. Our risks dashboard should have the 2 risks we have identified for Münchener Rückversicherungs-Gesellschaft in München.

Moreover, Münchener Rückversicherungs-Gesellschaft in München has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 45% over the next three years. As a result, the expected drop in Münchener Rückversicherungs-Gesellschaft in München's payout ratio explains the anticipated rise in the company's future ROE to 10%, over the same period.

Summary

On the whole, Münchener Rückversicherungs-Gesellschaft in München's performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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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