Is Hannover Rück SE's (ETR:HNR1) Recent Performance Tethered To Its Attractive Financial Prospects?

editorial-team@simplywallst.com (Simply Wall St)

Mon, Sep 23, 2024, 10:16 PM 3 min read

Most readers would already know that Hannover Rück's (ETR:HNR1) stock increased by 6.5% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Hannover Rück's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Hannover Rück

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 Hannover Rück is:

17% = €2.0b ÷ €11b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.17 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Hannover Rück's Earnings Growth And 17% ROE

To start with, Hannover Rück's ROE looks acceptable. Even when compared to the industry average of 16% the company's ROE looks quite decent. This probably goes some way in explaining Hannover Rück's moderate 7.3% growth over the past five years amongst other factors.

As a next step, we compared Hannover Rück's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 12% in the same period.

past-earnings-growth — XTRA:HNR1 Past Earnings Growth September 24th 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Hannover Rück's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hannover Rück Making Efficient Use Of Its Profits?

Hannover Rück has a healthy combination of a moderate three-year median payout ratio of 44% (or a retention ratio of 56%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Hannover Rück has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 48%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 19%.

Conclusion

In total, we are pretty happy with Hannover Rück's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.