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It is hard to get excited after looking at American Coastal Insurance's (NASDAQ:ACIC) recent performance, when its stock has declined 8.0% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to American Coastal Insurance's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for American Coastal Insurance
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for American Coastal Insurance is:
33% = US$85m ÷ US$260m (Based on the trailing twelve months to September 2024).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.33.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
A Side By Side comparison of American Coastal Insurance's Earnings Growth And 33% ROE
Firstly, we acknowledge that American Coastal Insurance has a significantly high ROE. Secondly, even when compared to the industry average of 15% the company's ROE is quite impressive. So, the substantial 54% net income growth seen by American Coastal Insurance over the past five years isn't overly surprising.
Next, on comparing with the industry net income growth, we found that American Coastal Insurance's growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.
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 American Coastal Insurance fairly valued compared to other companies? These 3 valuation measures might help you decide.