Swiss Life Holding (VTX: SLHN) had a difficult month with its share price down 12%. However, the company’s fundamentals look pretty decent and long-term financial data is generally in line with future market price movements. Today we will pay particular attention to the ROE of Swiss Life Holding.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
See our latest analysis for Swiss Life Holding
How to calculate return on equity?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Swiss Life Holding is:
7.6% = CHF 1.3 billion ÷ CHF 17 billion (based on trailing 12 months to December 2021).
The “yield” is the profit of the last twelve months. This therefore means that for each investment of CHF 1 by its shareholder, the company generates a profit of CHF 0.08.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
Profit growth and ROE of 7.6% at Swiss Life Holding
At first glance, the ROE of Swiss Life Holding does not make much noise. However, its ROE is similar to the industry average of 7.4%, so we won’t dismiss the company entirely. That said, Swiss Life Holding has posted weak net income growth of 4.4% over the past five years. Keep in mind that the company’s ROE is not very high. Therefore, this provides some context to the weak earnings growth the company is seeing.
Then, comparing with the net income growth of the sector, we found that the growth of Swiss Life Holding is quite high compared to the sector average growth of 1.0% over the same period, which is great to have.
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. Is Swiss Life Holding correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does Swiss Life Holding effectively reinvest its profits?
The high three-year median payout ratio of 56% (i.e. the company retains only 44% of its revenue) over the past three years for Swiss Life Holding suggests that the company’s earnings growth company was weaker due to the payout of a majority of its earnings.
Moreover, Swiss Life Holding has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends to earnings growth. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out approximately 65% of its earnings over the next three years. Still, forecasts suggest Swiss Life Holding’s future ROE will rise to 11%, even though the company’s payout ratio isn’t expected to change much.
Overall, we believe that Swiss Life Holding has positive characteristics. While its earnings growth is undoubtedly quite significant, we believe that the reinvestment rate is quite low, which means that the earnings growth figure could have been significantly higher had the company retained a greater part of its profits. We also studied the latest analyst forecasts and found that the company’s earnings growth is expected to be similar to its current growth rate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.