Has PICC Property and Casualty Company Limited's (HKG:2328) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Most readers would already be aware that PICC Property and Casualty's (HKG:2328) stock increased significantly by 40% 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 PICC Property and Casualty's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for PICC Property and Casualty

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 PICC Property and Casualty is:

9.3% = CN¥23b ÷ CN¥246b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.09 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

PICC Property and Casualty's Earnings Growth And 9.3% ROE

On the face of it, PICC Property and Casualty's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 9.0%, we may spare it some thought. On the other hand, PICC Property and Casualty reported a fairly low 4.9% net income growth over the past five years. Bear in mind, the company's ROE is not very high . Hence, this does provide some context to low earnings growth seen by the company.

When you consider the fact that the industry earnings have shrunk at a rate of 6.2% in the same 5-year period, the company's net income growth is pretty remarkable.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is PICC Property and Casualty fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is PICC Property and Casualty Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 36% (implying that the company retains the remaining 64% of its income), PICC Property and Casualty's earnings growth was quite low. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, PICC Property and Casualty has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 41% of its profits over the next three years. Regardless, the future ROE for PICC Property and Casualty is predicted to rise to 12% despite there being not much change expected in its payout ratio.

Conclusion

In total, it does look like PICC Property and Casualty has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.