Yahoo Finance Admiral Group plc's (LON:ADM) Stock Is Going Strong: Is the Market Following Fundamentals?
Admiral Group's (LON:ADM) stock is up by a considerable 12% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Admiral Group'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Admiral Group
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Admiral Group is:
39% = UK£372m ÷ UK£955m (Based on the trailing twelve months to December 2022).
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 £0.39.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Admiral Group's Earnings Growth And 39% ROE
Firstly, we acknowledge that Admiral Group has a significantly high ROE. Secondly, even when compared to the industry average of 6.2% the company's ROE is quite impressive. This probably laid the groundwork for Admiral Group's moderate 6.9% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that the growth figure reported by Admiral Group compares quite favourably to the industry average, which shows a decline of 11% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for ADM? You can find out in our latest intrinsic value infographic research report.
Is Admiral Group Efficiently Re-investing Its Profits?
While Admiral Group has a three-year median payout ratio of 67% (which means it retains 33% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.
Moreover, Admiral Group is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 91% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.
Conclusion
In total, we are pretty happy with Admiral Group's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
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