Is Weakness In PICC Property and Casualty Company Limited (HKG:2328) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

It is hard to get excited after looking at PICC Property and Casualty's (HKG:2328) recent performance, when its stock has declined 6.7% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on PICC Property and Casualty's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for PICC Property and Casualty

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for PICC Property and Casualty is:

10% = CN¥25b ÷ CN¥234b (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.10.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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 PICC Property and Casualty's Earnings Growth And 10% ROE

At first glance, PICC Property and Casualty seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 6.3%. Probably as a result of this, PICC Property and Casualty was able to see a decent growth of 7.9% over the last five years.

Next, on comparing with the industry net income growth, we found that the growth figure reported by PICC Property and Casualty compares quite favourably to the industry average, which shows a decline of 6.3% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about PICC Property and Casualty's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is PICC Property and Casualty Making Efficient Use Of Its Profits?

PICC Property and Casualty has a healthy combination of a moderate three-year median payout ratio of 38% (or a retention ratio of 62%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Besides, PICC Property and Casualty has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 41%. Accordingly, forecasts suggest that PICC Property and Casualty's future ROE will be 12% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with PICC Property and Casualty's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.

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