NobleOak Life Limited's (ASX:NOL) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

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It is hard to get excited after looking at NobleOak Life’s (ASX:NOL) recent performance, when its stock has declined 4.8% over the past three months. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on NobleOak Life’s ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for NobleOak Life

How Is ROE Calculated?

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 NobleOak Life is:

3.8% = AU$4.2m ÷ AU$112m (Based on the trailing twelve months to December 2021).

The ‘return’ refers to a company’s earnings over the last year. So, this means that for every A$1 of its shareholder’s investments, the company generates a profit of A$0.04.

What Has ROE Got To Do With Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

A Side By Side comparison of NobleOak Life’s Earnings Growth And 3.8% ROE

It is hard to argue that NobleOak Life’s ROE is much good in and of itself. Even compared to the average industry ROE of 9.9%, the company’s ROE is quite dismal. Although, we can see that NobleOak Life saw a modest net income growth of 14% over the past five years. We reckon that there could be other factors at play here. Such as – high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that NobleOak Life’s growth is quite high when compared to the industry average growth of 6.9% in the same period, which is great to see.

past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is NobleOak Life fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is NobleOak Life Efficiently Re-investing Its Profits?

NobleOak Life doesn’t pay any dividend, meaning that all of its profits are being reinvested in the business, which explains the fair bit of earnings growth the company has seen.

Conclusion

Overall, we feel that NobleOak Life certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.