Does The Market Have A Low Tolerance For White Mountains Insurance Group, Ltd.'s (NYSE:WTM) Mixed Fundamentals?

With its stock down 6.5% over the past three months, it is easy to disregard White Mountains Insurance Group (NYSE:WTM). It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. In this article, we decided to focus on White Mountains Insurance Group's ROE.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How Do You 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 White Mountains Insurance Group is:

2.4% = US$125m ÷ US$5.1b (Based on the trailing twelve months to March 2025).

The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.02.

Check out our latest analysis for White Mountains Insurance Group

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

White Mountains Insurance Group's Earnings Growth And 2.4% ROE

It is quite clear that White Mountains Insurance Group's ROE is rather low. Even when compared to the industry average of 13%, the ROE figure is pretty disappointing. Accordingly, White Mountains Insurance Group's low net income growth of 4.1% over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared White Mountains Insurance Group's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 14% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about White Mountains Insurance Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is White Mountains Insurance Group Using Its Retained Earnings Effectively?

A low three-year median payout ratio of 0.5% (implying that the company retains the remaining 99% of its income) suggests that White Mountains Insurance Group is retaining most of its profits. However, the low earnings growth number doesn't reflect this fact. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, White Mountains Insurance Group has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

On the whole, we feel that the performance shown by White Mountains Insurance Group can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 2 risks we have identified for White Mountains Insurance Group.

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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.