Is Safety Insurance Group, Inc.'s (NASDAQ:SAFT) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

By
Simply Wall St
Published
November 13, 2020
NasdaqGS:SAFT

Most readers would already be aware that Safety Insurance Group's (NASDAQ:SAFT) stock increased significantly by 8.6% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Safety Insurance 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Safety Insurance Group

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Safety Insurance Group is:

14% = US$113m ÷ US$838m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.14.

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 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.

Safety Insurance Group's Earnings Growth And 14% ROE

At first glance, Safety Insurance Group seems to have a decent ROE. Especially when compared to the industry average of 8.1% the company's ROE looks pretty impressive. Probably as a result of this, Safety Insurance Group was able to see an impressive net income growth of 25% over the last five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Safety Insurance Group's growth is quite high when compared to the industry average growth of 7.1% in the same period, which is great to see.

past-earnings-growth
NasdaqGS:SAFT Past Earnings Growth November 13th 2020

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is SAFT worth today? The intrinsic value infographic in our free research report helps visualize whether SAFT is currently mispriced by the market.

Is Safety Insurance Group Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 64% (implying that it keeps only 36% of profits) for Safety Insurance Group suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Safety Insurance Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Safety Insurance Group's performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Up till now, we've only made a short study of the company's growth data. You can do your own research on Safety Insurance Group and see how it has performed in the past by looking at this FREE detailed graph 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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