PICC Property and Casualty Company Limited's (HKG:2328) Stock Is Going Strong: Is the Market Following Fundamentals?

PICC Property and Casualty's (HKG:2328) stock is up by a considerable 18% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on PICC Property and Casualty's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How To Calculate Return On Equity?

Return on equity 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:

12% = CN¥32b ÷ CN¥261b (Based on the trailing twelve months to December 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.12 in profit.

Check out our latest analysis for PICC Property and Casualty

What Is The Relationship Between ROE And 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 12% ROE

To begin with, PICC Property and Casualty seems to have a respectable ROE. Especially when compared to the industry average of 9.6% the company's ROE looks pretty impressive. This certainly adds some context to PICC Property and Casualty's decent 5.6% net income growth seen over the past five years.

We then compared PICC Property and Casualty'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 4.1% in the same 5-year period.

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). 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?

With a three-year median payout ratio of 38% (implying that the company retains 62% of its profits), it seems that PICC Property and Casualty is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, PICC Property and Casualty has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 37% of its profits over the next three years. Accordingly, forecasts suggest that PICC Property and Casualty's future ROE will be 13% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy 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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.