Shares of United Fire Group (NASDAQ:UFCS) are up 30% in the past three months. But the company’s key financial indicators seem to differ across the board, leading us to wonder whether the company’s current share price momentum can be sustained or not. In this article, we decided to focus on United Fire Group ROE.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simple terms, it is used to assess the profitability of a company in relation to its equity.
Check out our latest analysis for United Fire Group
How do you calculate return on equity?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for United Fire Group is:
1.7% = $14 million ÷ $815 million (based on trailing 12 months to September 2021).
The “yield” is the profit of the last twelve months. One way to conceptualize this is that for every dollar of share capital it has, the company has made a profit of $0.02.
What is the relationship between ROE and earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
United Fire Group Earnings Growth and ROE of 1.7%
As you can see, United Fire Group’s ROE looks pretty low. Even compared to the industry average of 11%, the ROE figure is quite disappointing. For this reason, United Fire Group’s 56% decline in net income over five years is not surprising given its lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. For example, the company has a very high payout rate or faces competitive pressures.
That being said, we benchmarked United Fire Group’s performance against the industry and were concerned when we found that while the company had cut profits, the industry had increased profits at a rate of 12% in during the same period.
Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. 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. Thus, you might want to check whether United Fire Group is trading on a high P/E or on a low P/E, relative to its industry.
Does United Fire Group effectively reinvest its profits?
Considering its three-year median payout ratio of 38% (or a 62% retention rate), which is fairly normal, United Fire Group’s earnings decline is rather puzzling, as one would expect to see good growth when a company retains a good portion of its profits. It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.
Additionally, United Fire Group has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of company growth. ‘business. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out about 43% of its earnings over the next three years. Either way, United Fire Group’s future ROE is expected to reach 3.7% despite little change expected in its payout ratio.
All in all, we’re a little mixed on United Fire Group’s performance. Although the company has a high earnings retention rate, its low rate of return is likely hampering its earnings growth. That said, we studied the latest analyst forecasts and found that while the company has cut earnings in the past, analysts expect earnings to increase in the future. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.