Gjensidige Forsikring (OB: GJF) had a strong run in the equity market with his stock rising significantly 11% over the past month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market results. Specifically, we decided to study Gjensidige Forsikring’s ROE in this article.
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 simpler terms, it measures a company’s profitability relative to equity.
See our latest review for Gjensidige Forsikring
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, Gjensidige Forsikring’s ROE is:
30% = kr6.8b ÷ kr23b (based on the last twelve months up to March 2021).
The “return” is the income the business has earned over the past year. This means that for every NOK1 value of equity, the company generated NOK0.30 in profit.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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.
Gjensidige Forsikring profit growth and 30% ROE
For starters, Gjensidige Forsikring has a fairly high ROE which is interesting. Secondly, a comparison with the industry’s reported average ROE of 8.2% also does not go unnoticed for us. This likely laid the foundation for Gjensidige Forsikring’s moderate 5.3% net income growth over the past five years.
Then, comparing Gjensidige Forsikring’s net income growth with the industry, we found that the reported growth of the company is similar to the industry average growth rate of 6.6% 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. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. Is the GJF correctly valued? This intrinsic business value infographic has everything you need to know.
Is Gjensidige Forsikring using his profits effectively?
Gjensidige Forsikring has a significant three-year median payout ratio of 81%, which means he only has 19% left to reinvest in his business. This implies that the company has been able to achieve decent profit growth despite returning most of its profits to shareholders.
In addition, Gjensidige Forsikring 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. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 86%. Still, forecasts suggest that Gjensidige Forsikring’s future ROE will drop to 21% even though the company’s payout ratio is unlikely to change much.
Overall, we think Gjensidige Forsikring’s performance has been quite good. In particular, his high ROE is quite remarkable and also the probable explanation for his considerable growth in earnings. Yet the company retains a small portion of its profits. Which means the company was able to increase its profits despite this, so it’s not that bad. That said, looking at current analysts’ estimates, we were concerned that while the company has increased profits in the past, analysts expect its profits to decline in the future. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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