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Most readers would already know that SiriusPoint's (NYSE:SPNT) stock increased by 4.7% over the past week. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Particularly, we will be paying attention to SiriusPoint's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for SiriusPoint
How To Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for SiriusPoint is:
12% = US$321m ÷ US$2.6b (Based on the trailing twelve months to March 2024).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.12 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
A Side By Side comparison of SiriusPoint's Earnings Growth And 12% ROE
To begin with, SiriusPoint seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 13%. This probably goes some way in explaining SiriusPoint's moderate 5.3% growth over the past five years amongst other factors.
As a next step, we compared SiriusPoint's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 8.4% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about SiriusPoint's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.