Sjóvá-Almennar tryggingar hf.'s (ICE:SJOVA) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Sjóvá-Almennar tryggingar hf's (ICE:SJOVA) stock increased significantly by 31% 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 Sjóvá-Almennar tryggingar hf'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.

See our latest analysis for Sjóvá-Almennar tryggingar hf

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 Sjóvá-Almennar tryggingar hf is:

17% = Kr3.1b ÷ Kr18b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every ISK1 of its shareholder's investments, the company generates a profit of ISK0.17.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Sjóvá-Almennar tryggingar hf's Earnings Growth And 17% ROE

To begin with, Sjóvá-Almennar tryggingar hf seems to have a respectable ROE. Especially when compared to the industry average of 9.5% the company's ROE looks pretty impressive. This certainly adds some context to Sjóvá-Almennar tryggingar hf's decent 15% net income growth seen over the past five years.

As a next step, we compared Sjóvá-Almennar tryggingar hf's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 6.3%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Sjóvá-Almennar tryggingar hf fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sjóvá-Almennar tryggingar hf Using Its Retained Earnings Effectively?

Sjóvá-Almennar tryggingar hf has a significant three-year median payout ratio of 84%, meaning that it is left with only 16% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, Sjóvá-Almennar tryggingar hf has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Sjóvá-Almennar tryggingar hf's performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Sjóvá-Almennar tryggingar hf's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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