Is QBE Insurance Group Limited’s (ASX:QBE) Recent Stock Performance Tethered To Its Strong Fundamentals?

QBE Insurance Group (ASX:QBE) has had a great run on the share market with its stock up by a significant 19% over the last three months. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to QBE Insurance Group’s ROE today.

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Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

View our latest analysis for QBE Insurance Group

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

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So, based on the above formula, the ROE for QBE Insurance Group is:

17% = US$1.8b ÷ US$10b (Based on the trailing twelve months to June 2024).

The ‘return’ refers to a company’s earnings over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.17 in profit.

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

At first glance, QBE Insurance Group seems to have a decent ROE. Further, the company’s ROE compares quite favorably to the industry average of 12%. Probably as a result of this, QBE Insurance Group was able to see an impressive net income growth of 47% over the last five years. We reckon that there could also be other factors at play here. Such as – high earnings retention or an efficient management in place.

As a next step, we compared QBE Insurance Group’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 17%.

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The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. Is QBE Insurance Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

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