Yahoo Finance Are Cincinnati Financial Corporation's (NASDAQ:CINF) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?
With its stock down 6.5% over the past month, it is easy to disregard Cincinnati Financial (NASDAQ:CINF). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Cincinnati Financial's ROE.
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.
Check out our latest analysis for Cincinnati Financial
How To 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 Cincinnati Financial is:
19% = US$2.4b ÷ US$13b (Based on the trailing twelve months to March 2024).
The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.19 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Cincinnati Financial's Earnings Growth And 19% ROE
To begin with, Cincinnati Financial seems to have a respectable ROE. Especially when compared to the industry average of 13% the company's ROE looks pretty impressive. Despite this, Cincinnati Financial's five year net income growth was quite low averaging at only 2.9%. That's a bit unexpected from a company which has such a high rate of return. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
We then compared Cincinnati Financial's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.4% in the same 5-year period, which is a bit concerning.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is CINF fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Cincinnati Financial Using Its Retained Earnings Effectively?
Cincinnati Financial's low three-year median payout ratio of 20% (or a retention ratio of 80%) should mean that the company is retaining most of its earnings to fuel its growth. However, the low earnings growth number doesn't reflect this fact. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Additionally, Cincinnati Financial has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 49% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 8.0%) over the same period.
Summary
In total, it does look like Cincinnati Financial has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
