Are CIG Pannónia Életbiztosító Nyrt's (BUSE:CIGPANNONIA) Mixed Financials Driving The Negative Sentiment?

CIG Pannónia Életbiztosító Nyrt (BUSE:CIGPANNONIA) has had a rough three months with its share price down 10%. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on CIG Pannónia Életbiztosító Nyrt'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for CIG Pannónia Életbiztosító Nyrt

How To 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 CIG Pannónia Életbiztosító Nyrt is:

5.3% = Ft735m ÷ Ft14b (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each HUF1 of shareholders' capital it has, the company made HUF0.05 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of CIG Pannónia Életbiztosító Nyrt's Earnings Growth And 5.3% ROE

On the face of it, CIG Pannónia Életbiztosító Nyrt's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 8.7% either. Therefore, it might not be wrong to say that the five year net income decline of 8.3% seen by CIG Pannónia Életbiztosító Nyrt was probably the result of it having a lower ROE. We reckon that there could also be other factors at play here. For example, it is possible that the business has allocated capital poorly or that the company has a very high payout ratio.

However, when we compared CIG Pannónia Életbiztosító Nyrt's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 6.3% in the same period. This is quite worrisome.

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 CIG Pannónia Életbiztosító Nyrt fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is CIG Pannónia Életbiztosító Nyrt Making Efficient Use Of Its Profits?

While the company did payout a portion of its dividend in the past, it currently doesn't pay a dividend. This implies that potentially all of its profits are being reinvested in the business.

Summary

Overall, we have mixed feelings about CIG Pannónia Életbiztosító Nyrt. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 3 risks we have identified for CIG Pannónia Életbiztosító Nyrt by visiting our risks dashboard for free on our platform here.

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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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