Gjensidige Forsikring's (OB:GJF) stock is up by 5.4% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Gjensidige Forsikring's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How Do You 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 Gjensidige Forsikring is:
20% = kr5.0b ÷ kr25b (Based on the trailing twelve months to December 2020).
The 'return' refers to a company's earnings over the last year. That means that for every NOK1 worth of shareholders' equity, the company generated NOK0.20 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Gjensidige Forsikring's Earnings Growth And 20% ROE
At first glance, Gjensidige Forsikring seems to have a decent ROE. Especially when compared to the industry average of 8.6% the company's ROE looks pretty impressive. However, for some reason, the higher returns aren't reflected in Gjensidige Forsikring's meagre five year net income growth average of 3.6%. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.
Next, on comparing with the industry net income growth, we found that Gjensidige Forsikring's reported growth was lower than the industry growth of 5.6% in the same period, which is not something we like to see.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is GJF worth today? The intrinsic value infographic in our free research report helps visualize whether GJF is currently mispriced by the market.
Is Gjensidige Forsikring Efficiently Re-investing Its Profits?
Gjensidige Forsikring has a three-year median payout ratio of 87% (implying that it keeps only 13% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.
Moreover, Gjensidige Forsikring has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. 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%. As a result, Gjensidige Forsikring's ROE is not expected to change by much either, which we inferred from the analyst estimate of 21% for future ROE.
Overall, we feel that Gjensidige Forsikring certainly does have some positive factors to consider. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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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