It is hard to get excited after looking at Kinsale Capital Group's (NASDAQ:KNSL) recent performance, when its stock has declined 23% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Kinsale Capital Group's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
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 Kinsale Capital Group is:
15% = US$88m ÷ US$576m (Based on the trailing twelve months to December 2020).
The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.15 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. 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.
Kinsale Capital Group's Earnings Growth And 15% ROE
To begin with, Kinsale Capital Group seems to have a respectable ROE. On comparing with the average industry ROE of 8.9% the company's ROE looks pretty remarkable. This certainly adds some context to Kinsale Capital Group's exceptional 29% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing with the industry net income growth, we found that Kinsale Capital Group's growth is quite high when compared to the industry average growth of 6.6% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. 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 Kinsale Capital Group fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Kinsale Capital Group Using Its Retained Earnings Effectively?
Kinsale Capital Group's ' three-year median payout ratio is on the lower side at 14% implying that it is retaining a higher percentage (86%) of its profits. So it looks like Kinsale Capital Group is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Moreover, Kinsale Capital Group is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 10% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.
Overall, we are quite pleased with Kinsale Capital Group's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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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