Could The Market Be Wrong About The Stock?

With its stock down 8.9% over the past month, it is easy to disregard Universal Insurance Holdings (NYSE:UVE). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Universal Insurance Holdings’ ROE today.

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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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Universal Insurance Holdings

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 Universal Insurance Holdings is:

18% = US$73m ÷ US$400m (Based on the trailing twelve months to September 2024).

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 $0.18.

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, Universal Insurance Holdings seems to have a decent ROE. Especially when compared to the industry average of 14% the company’s ROE looks pretty impressive. Probably as a result of this, Universal Insurance Holdings was able to see a decent growth of 9.8% over the last five years.

As a next step, we compared Universal Insurance Holdings’ net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 13% in the same period.

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Earnings growth is an important metric to consider when valuing a stock. 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. If you’re wondering about Universal Insurance Holdings”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

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