Zurich Insurance Group (VTX:ZURN) stock is up 3.5% over the past three months. Given its impressive performance, we decided to examine the company’s key financial indicators, as a company’s long-term fundamentals usually dictate market performance. Specifically, we decided to examine Zurich Insurance Group’s ROE in this article.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. Put another way, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis on Zurich Insurance Group
How is ROE calculated?
The formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Zurich Insurance Group is:
20% = US$5.1 billion ÷ US$25 billion (Based on trailing twelve months to June 2023).
“Return” refers to the company’s earnings over the past year. Another way to think about it is that for every 1 Swiss franc worth of equity, the company was able to earn 0.20 Swiss francs in profit.
Why is ROE important to earnings growth?
So far we have learned that ROE measures how efficiently a company generates its profits. Based on how much of its earnings the company chooses to reinvest or “hold,” we can then estimate the company’s future ability to generate earnings. All else being equal, companies that have both a higher return on equity and a higher earnings retention tend to be the ones that have a higher growth rate than companies that don’t. same characteristics.
Side by side comparison of Zurich Insurance Group’s revenue growth and 20% ROE
To begin with, Zurich Insurance Group has quite a high ROE, which is interesting. Also, the company’s ROE is higher compared to the industry average of 16%, which is quite remarkable. That likely paved the way for the modest 8.1% net income growth Zurich Insurance Group has seen over the past five years.
Then, comparing the industry net income growth, we found that Zurich Insurance Group’s growth was quite high compared to the industry average growth of 6.3% over the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. It is important for the investor to know whether the market has priced in the expected growth (or decline) of the company’s earnings. That way, they’ll have an idea if the stock has headed for clear blue waters or if they’re in for muddy waters. Is the market pricing in the future outlook for ZURN? You can find out in our latest Intrinsic Value Infographic Research Report.
Does Zurich Insurance Group effectively reinvest its earnings?
Zurich Insurance Group has a significant three-year average payout ratio of 77%, meaning it has only 23% left to reinvest in its business. This means that the company has managed to achieve decent earnings growth despite returning most of its profits to shareholders.
Furthermore, Zurich Insurance Group is committed to continuing to share its profits with shareholders, which we infer 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 approximately 78%. Accordingly, forecasts indicate that Zurich Insurance Group’s future ROE will be 19%, which is again similar to the current ROE.
Overall, we are quite satisfied with the performance of Zurich Insurance Group. We are particularly impressed by the significant earnings growth reported by the company, which was likely supported by the high ROE. Even though the company pays out most of its earnings as dividends, it has managed to grow revenue nonetheless, so that’s probably a good sign. Researching current analyst estimates, we find that analysts expect the company to continue its recent growth streak. Are these analyst expectations based on general industry expectations or the company’s fundamentals? Click here to be taken to our analyst’s forecast page for the company.
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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts, using only an 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. We aim to provide you with long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.