Most readers would already know that RenaissanceRe Holdings’ (NYSE:RNR) stock increased by 4.2% over the past month. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on RenaissanceRe Holdings’ 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Is ROE Calculated?
Return on equity 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 RenaissanceRe Holdings is:
9.1% = US$993m ÷ US$11b (Based on the trailing twelve months to December 2020).
The ‘return’ is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders’ equity, the company generated $0.09 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.
RenaissanceRe Holdings’ Earnings Growth And 9.1% ROE
When you first look at it, RenaissanceRe Holdings’ ROE doesn’t look that attractive. However, its ROE is similar to the industry average of 9.0%, so we won’t completely dismiss the company. Even so, RenaissanceRe Holdings has shown a fairly decent growth in its net income which grew at a rate of 13%. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company’s growth. 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.
As a next step, we compared RenaissanceRe Holdings’ net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 6.2%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is RNR worth today? The intrinsic value infographic in our free research report helps visualize whether RNR is currently mispriced by the market.
Is RenaissanceRe Holdings Using Its Retained Earnings Effectively?
In RenaissanceRe Holdings’ case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 9.7% (or a retention ratio of 90%), which suggests that the company is investing most of its profits to grow its business.
Moreover, RenaissanceRe Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Existing analyst estimates suggest that the company’s future payout ratio is expected to drop to 7.6% over the next three years. The fact that the company’s ROE is expected to rise to 11% over the same period is explained by the drop in the payout ratio.
On the whole, we do feel that RenaissanceRe Holdings has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company’s earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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