Is Gjensidige Forsikring ASA's (OB:GJF) Stock's Recent Performance A Reflection Of Its Financial Health?

By
Simply Wall St
Published
April 12, 2022
OB:GJF
Source: Shutterstock

Most readers would already know that Gjensidige Forsikring's (OB:GJF) stock increased by 2.2% over the past month. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Gjensidige Forsikring's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out 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:

28% = kr7.1b ÷ kr25b (Based on the trailing twelve months to December 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every NOK1 worth of equity, the company was able to earn NOK0.28 in profit.

Why Is ROE Important For 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 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.

Gjensidige Forsikring's Earnings Growth And 28% ROE

First thing first, we like that Gjensidige Forsikring has an impressive ROE. Secondly, even when compared to the industry average of 10% the company's ROE is quite impressive. This probably laid the groundwork for Gjensidige Forsikring's moderate 10% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Gjensidige Forsikring's growth is quite high when compared to the industry average growth of 7.5% in the same period, which is great to see.

past-earnings-growth
OB:GJF Past Earnings Growth April 12th 2022

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. 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 Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 57% (or a retention ratio of 43%) for Gjensidige Forsikring suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Gjensidige Forsikring has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 83% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 22%, over the same period.

Conclusion

Overall, we are quite pleased with Gjensidige Forsikring's performance. 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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