Helios Underwriting’s (LON:HUW) stock is up by 7.2% 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. Specifically, we decided to study Helios Underwriting’s ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
Check out our latest analysis for Helios Underwriting
How Is ROE Calculated?
ROE 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 Helios Underwriting is:
12% = UK£16m ÷ UK£140m (Based on the trailing twelve months to December 2023).
The ‘return’ is the profit over the last twelve months. So, this means that for every £1 of its shareholder’s investments, the company generates a profit of £0.12.
What Has ROE Got To Do With Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. 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.
Helios Underwriting’s Earnings Growth And 12% ROE
To start with, Helios Underwriting’s ROE looks acceptable. Even when compared to the industry average of 14% the company’s ROE looks quite decent. Consequently, this likely laid the ground for the impressive net income growth of 31% seen over the past five years by Helios Underwriting. However, there could also be other drivers behind this growth. Such as – high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that the growth figure reported by Helios Underwriting compares quite favourably to the industry average, which shows a decline of 14% over the last few years.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. 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 Helios Underwriting is trading on a high P/E or a low P/E, relative to its industry.
Is Helios Underwriting Making Efficient Use Of Its Profits?
Helios Underwriting has a LTM (or last twelve month) payout ratio of 28% (where it is retaining 72% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Helios Underwriting is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Besides, Helios Underwriting has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to rise to 62% over the next three years. However, Helios Underwriting’s future ROE is expected to rise to 25% despite the expected increase in the company’s payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company’s ROE.
Summary
Overall, we are quite pleased with Helios Underwriting’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 substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company’s earnings growth is expected to slow down. 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.