Is Chubb Limited's (NYSE:CB) Recent Performance Tethered To Its Attractive Financial Prospects?

Chubb's (NYSE:CB) stock up by 6.0% over the past three months. 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. Particularly, we will be paying attention to Chubb's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

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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 Chubb is:

14% = US$9.6b ÷ US$68b (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.14 in profit.

See our latest analysis for Chubb

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Chubb's Earnings Growth And 14% ROE

At first glance, Chubb seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 15%. This certainly adds some context to Chubb's moderate 18% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Chubb's growth is quite high when compared to the industry average growth of 12% 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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Chubb's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Chubb Efficiently Re-investing Its Profits?

In Chubb's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 17% (or a retention ratio of 83%), which suggests that the company is investing most of its profits to grow its business.

Besides, Chubb has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 15%. Accordingly, forecasts suggest that Chubb's future ROE will be 14% which is again, similar to the current ROE.

Summary

Overall, we are quite pleased with Chubb's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.