Old Republic International Corporation (NYSE: ORI) fundamentals look pretty solid: Could the market be wrong about the stock?
With its stock down 9.3% in the past month, it’s easy to overlook Old Republic International (NYSE: ORI). However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. In this article, we’ve decided to focus on Old Republic International’s ROE.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for Old Republic International
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Old Republic International is:
23% = US $ 1.6 billion ÷ US $ 6.8 billion (based on the last twelve months to June 2021).
The “return” is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every $ 1 of shareholder capital it has, the company has made $ 0.23 in profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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.
A side-by-side comparison of Old Republic International’s profit growth and 23% ROE
For starters, Old Republic International has a pretty high ROE, which is interesting. Second, even compared to the industry average of 12%, the company’s ROE is quite impressive. This likely laid the foundation for Old Republic International’s moderate 19% net income growth seen over the past five years.
In the next step, we compared Old Republic International’s net income growth with the industry and luckily we found that the growth observed by the company is higher than the industry average growth of 13 %.
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 will help them determine whether the future of the stock looks bright or threatening. Has the market taken into account the future prospects of ORI? You can find out in our latest Intrinsic Value infographic research report.
Is Old Republic International Efficiently Reinvesting Its Profits?
With a median payout rate of 35% over three years (implying that the company keeps 65% of its profits), it looks like Old Republic International is reinvesting effectively so as to see respectable profit growth and pay a dividend. which is well covered.
In addition, Old Republic International has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with its shareholders. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 37% of its profits over the next three years.
Overall, we are quite happy with the performance of Old Republic International. 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. However, according to the latest forecast from industry analysts, the company’s profits are expected to decline in the future. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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 documents. Simply Wall St has no position in the mentioned stocks.
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