Principal Financial Group, Inc. (NASDAQ: PFG) shares soar but financials look inconsistent: will the uptrend continue?

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Principal Financial Group (NASDAQ: PFG) has seen good progress in the stock market with a stock rising 21% in the past three months. But the major financial metrics of the company appear to differ across the board, leading us to question whether the current momentum in the company’s stock price can be sustained or not. Specifically, we have decided to study the ROE of Principal Financial Group in this article.

Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.

Check out our latest analysis for Principal Financial Group

How to calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

Thus, based on the above formula, the ROE of the main financial group is:

7.8% = 1.3 billion USD ÷ 16 billion USD (based on the last twelve months up to September 2020).

The “return” is the income the business has earned over the past year. This means that for every dollar of equity, the company generated $ 0.08 in profit.

What is the relationship between ROE and profit growth?

So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of that profit the company reinvests or “withholds”, and how effectively it does so, we are then able to assess a company’s profit growth potential. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.

Profit growth of the main Financial Group and ROE of 7.8%

At first glance, Principal Financial Group’s ROE isn’t much to say. However, its ROE is similar to the industry average of 8.1%, so we won’t dismiss the company completely. That said, Principal Financial Group has posted weak net profit growth of 2.2% over the past five years. Keep in mind that the company’s ROE is not particularly good to begin with. So this could also be one of the reasons for the company’s weak profit growth.

We then compared Principal Financial Group’s net profit growth with the industry and found that the company’s growth figure is lower than the industry average growth rate of 6.6% over the same period. , which is a bit disturbing.

NasdaqGS: PFG Past profit growth as of January 1, 2021

Profit growth is an important metric to consider when valuing a stock. The investor should try to determine whether the expected growth or decline in earnings, whatever the case, is taken into account. In doing so, he will have an idea if the title is heading for clear blue waters or swampy waters ahead. A 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 outlook. So, you might want to check if Principal Financial Group is trading high P / E or low P / E, relative to its industry.

Is the Major Financial Group Efficiently Using Retained Earnings?

Despite a normal three-year median payout rate of 39% (or a retention rate of 61% over the past three years, Principal Financial Group has seen very little profit growth as we have seen above. Therefore, there may be other reasons for the lack in this regard, for example, the business could be in decline.

Additionally, Principal Financial Group has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 37%. However, Principal Financial Group’s ROE is expected to rise to 11% despite no anticipated change in its payout ratio.

summary

Overall, we are a little ambivalent about the performance of Principal Financial Group. Although the company has a high reinvestment rate, the low ROE means that all that reinvestment does not yield any benefit to its investors, and moreover, it has a negative impact on profit growth. That said, the latest forecast from industry analysts shows that the company’s profits are expected to pick up. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim 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 information. Simply Wall St has no position in any of the stocks mentioned.
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