Does the recent performance of Aflac Incorporated (NYSE: AFL) stock reflect its financial health?

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Aflac (NYSE: AFL) stock is up 3.9% over the past week. Given its impressive performance, we decided to study the company’s key financial metrics, as a company’s long-term fundamentals usually dictate market results. In this article, we have decided to focus on Aflac’s ROE.

Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. Simply put, it is used to assess a company’s profitability against its equity.

See our latest analysis for Aflac

How do you calculate return on equity?

The return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Aflac is:

17% = US $ 5.8B ÷ US $ 34B (Based on the last twelve months to June 2021).

The “return” is the profit of the last twelve months. This means that for every dollar in shareholders’ equity, the company generated $ 0.17 in profit.

What does ROE have to do with profit growth?

So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

Growth in Aflac profits and 17% ROE

At first glance, Aflac appears to have a decent ROE. Especially compared to the industry average of 12%, the company’s ROE looks pretty impressive. This likely laid the foundation for Aflac’s moderate 11% net income growth seen over the past five years.

In the next step, we compared Aflac’s net income growth with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 13% over the course of the same period.

NYSE: AFL Past Profit Growth October 8, 2021

Profit growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Aflac is trading high P / E or low P / E, relative to its industry.

Is Aflac Efficiently Using Its Retained Earnings?

Aflac’s three-year median payout ratio to shareholders is 24% (implying it keeps 76% of its revenue), which is lower, so it looks like management is heavily reinvesting profits to grow their business.

In addition, Aflac is determined to continue to share its profits with its shareholders, which we can deduce from its long history of paying dividends for at least ten years. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 27%. However, Aflac’s future ROE is expected to drop to 12% although there is not much change expected in the company’s payout ratio.

Summary

All in all, we are quite satisfied with the performance of Aflac. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. That said, looking at current analysts’ estimates, we were concerned that while the company has increased profits in the past, analysts expect its profits to decline in the future. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.

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