Most readers already know that White Mountains Insurance Group (NYSE: WTM) stock rose 3.6% in the past month. Given that the market rewards strong, long-term financials, we wonder if this is the case in this case. In this article, we have decided to focus on the ROE of White Mountains Insurance Group.
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. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest review for White Mountains Insurance Group
How do you calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for White Mountains Insurance Group is:
17% = US $ 701 million ÷ US $ 4.1 billion (based on the last twelve months to June 2021).
“Return” refers to a company’s profits over the past year. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.17.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess the profits that the company is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the company. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
White Mountains Insurance Group profit growth and ROE of 17%
For starters, the ROE of White Mountains Insurance Group seems acceptable. Additionally, the company’s ROE compares quite favorably to the industry average of 12%. It is probably because of this that White Mountains Insurance Group has recorded impressive net profit growth of 62% over the past five years. We believe there could be other factors at play here as well. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
Then, comparing with the industry net income growth, we found that the growth of White Mountains Insurance Group is quite high compared to the industry average growth of 13% during the same period, this which is great to see.
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. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. Is White Mountains Insurance Group fair compared to other companies? These 3 evaluation measures could help you decide.
Is White Mountains Insurance Group Efficiently Reinvesting Profits?
White Mountains Insurance Group’s three-year median payout ratio to shareholders is 0.8%, which is quite low. This implies that the company keeps 99% of its profits. So it appears that management is reinvesting the profits massively to grow their business, which is reflected in the profit growth figure.
In addition, White Mountains Insurance Group 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 satisfied with the performance of White Mountains Insurance Group. Specifically, we like the fact that the company reinvests a large portion of its profits at a high rate of return. This of course allowed the company to experience substantial growth in profits. If the company continues to grow earnings like it has, it could have a positive impact on its stock price given the influence of earnings per share on long-term stock prices. Remember that the price of a stock also depends on the perceived risk. Therefore, investors should keep themselves informed of the risks involved before investing in a business. To learn about the 1 risk we have identified for White Mountains Insurance Group, visit our free risk dashboard.
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 has no position in the mentioned stocks.
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