Most readers already know that stock of Erie Indemnity (NASDAQ: ERIE) has risen significantly 5.9% over the past month. Given that the market rewards strong, long-term financials, we wonder if this is the case in this case. Specifically, we have decided to study the ROE of Erie Indemnity in this article.
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. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
See our latest review for Erie Indemnity
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 Erie Indemnity is:
24% = US $ 305 million ÷ US $ 1.2 billion (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 $ 0.24 in profit.
What does ROE have to do with profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess how much profit the company is reinvesting or “holding back” for future growth, which then gives us an idea of the growth potential of the company. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Erie Indemnity’s 24% profit growth and ROE
For starters, Erie Indemnity has a pretty high ROE, which is interesting. Second, even compared to the industry average of 12%, the company’s ROE is quite impressive. Probably because of this, Erie Indemnity has been able to see a decent 11% net income growth over the past five years.
Then, comparing Erie Indemnity’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 13% over the same period.
Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine whether the future of the stock looks bright or threatening. 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 Erie Indemnity is trading high P / E or low P / E, relative to its industry.
Is Erie Indemnity Efficiently Using Its Retained Earnings?
While Erie Indemnity has a three-year median payout ratio of 67% (meaning it keeps 33% of profits), the company has seen good profit growth in the past again, which means its High payout ratio did not hamper its ability to grow.
In addition, Erie Indemnity 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.
Overall, we are quite happy with the performance of Erie Indemnity. We are particularly impressed with the significant profit growth posted by the company, possibly supported by its high ROE. While the company pays out most of its profits as dividends, it was able to increase its profits despite this, so that’s probably a good sign. That said, the latest forecast from industry analysts shows that the company’s earnings growth is expected to slow. 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.
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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 does not have any position in the mentioned stocks.
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