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With its stock down 23% over the past three months, it is easy to disregard Admiral Group (LON:ADM). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Admiral Group's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Admiral Group
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Admiral Group is:
41% = UK£583m ÷ UK£1.4b (Based on the trailing twelve months to December 2021).
The 'return' is the yearly profit. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.41 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Admiral Group's Earnings Growth And 41% ROE
First thing first, we like that Admiral Group has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 12% which is quite remarkable. This likely paved the way for the modest 19% net income growth seen by Admiral Group over the past five years. growth
Given that the industry shrunk its earnings at a rate of 6.1% in the same period, the net income growth of the company is quite impressive.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is ADM worth today? The intrinsic value infographic in our free research report helps visualize whether ADM is currently mispriced by the market.
Is Admiral Group Efficiently Re-investing Its Profits?
Admiral Group has a significant three-year median payout ratio of 67%, meaning that it is left with only 33% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.