Are Strong Financial Prospects The Force That Is Driving The Momentum In Gjensidige Forsikring ASA's OB:GJF) Stock?

By
Simply Wall St
Published
July 11, 2021
OB:GJF
Source: Shutterstock

Gjensidige Forsikring (OB:GJF) has had a great run on the share market with its stock up by a significant 11% over the last month. 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. Specifically, we decided to study Gjensidige Forsikring's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Gjensidige Forsikring

How To Calculate Return On Equity?

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 Gjensidige Forsikring is:

30% = kr6.8b ÷ kr23b (Based on the trailing twelve months to March 2021).

The 'return' is the income the business earned over the last year. That means that for every NOK1 worth of shareholders' equity, the company generated NOK0.30 in profit.

What Is The Relationship Between ROE And 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. 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.

Gjensidige Forsikring's Earnings Growth And 30% ROE

To begin with, Gjensidige Forsikring has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 8.2% also doesn't go unnoticed by us. This probably laid the groundwork for Gjensidige Forsikring's moderate 5.3% net income growth seen over the past five years.

Next, on comparing Gjensidige Forsikring's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 6.6% in the same period.

past-earnings-growth
OB:GJF Past Earnings Growth July 11th 2021

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is GJF fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Gjensidige Forsikring Making Efficient Use Of Its Profits?

Gjensidige Forsikring has a significant three-year median payout ratio of 81%, meaning that it is left with only 19% 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, Gjensidige Forsikring 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 86%. Still, forecasts suggest that Gjensidige Forsikring's future ROE will drop to 21% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we feel that Gjensidige Forsikring's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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. 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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