Is the market following strong financials?
Markel (NYSE:MKL) stock is up 4.1% over 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 decided to focus on Markel’s ROE.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
See our latest analysis for Markel
How is ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Markel is:
17% = US$2.4 billion ÷ US$14 billion (based on trailing 12 months to September 2021).
The “yield” is the amount earned after tax over the last twelve months. This means that for every dollar of shareholders’ equity, the company generated $0.17 in profit.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Markel’s earnings growth and 17% ROE
For starters, Markel seems to have a respectable ROE. Compared to the industry average ROE of 11%, the company’s ROE looks quite remarkable. Probably because of this, Markel has been able to see an impressive net income growth of 41% 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.
As a next step, we compared Markel’s net income growth with the industry, and fortunately, we found that the growth the company saw was above the industry average growth of 12%.
Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. What is MKL worth today? The intrinsic value infographic in our free research report visualizes whether MKL is currently being mispriced by the market.
Does Markel effectively reinvest its profits?
Since Markel pays no dividends to its shareholders, we infer that the company has reinvested all of its profits to grow its business.
Overall, we’re pretty happy with Markel’s performance. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. However, according to the latest forecasts from industry analysts, the company’s earnings are likely to decline in the future. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.