Yahoo Finance RenaissanceRe Holdings Ltd.'s (NYSE:RNR) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?
RenaissanceRe Holdings (NYSE:RNR) has had a rough three months with its share price down 3.7%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study RenaissanceRe Holdings' ROE in this article.
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.
See our latest analysis for RenaissanceRe Holdings
How Do You Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for RenaissanceRe Holdings is:
21% = US$3.4b ÷ US$16b (Based on the trailing twelve months to March 2024).
The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.21.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of RenaissanceRe Holdings' Earnings Growth And 21% ROE
To start with, RenaissanceRe Holdings' ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 13%. Probably as a result of this, RenaissanceRe Holdings was able to see a decent growth of 9.8% over the last five years.
As a next step, we compared RenaissanceRe Holdings' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 8.4% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One 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 prospects. So, you may want to check if RenaissanceRe Holdings is trading on a high P/E or a low P/E, relative to its industry.
Is RenaissanceRe Holdings Making Efficient Use Of Its Profits?
RenaissanceRe Holdings' LTM (or last twelve month) payout ratio to shareholders is 3.3% (implying that it retains 97% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.
Besides, RenaissanceRe Holdings has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 4.5% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 16%, over the same period.
Conclusion
In total, we are pretty happy with RenaissanceRe Holdings' 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 substantial growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
