UnitedHealth Group (NYSE:UNH) has had a rough month with its share price down 2.0%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on UnitedHealth Group’s ROE.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for UnitedHealth Group
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for UnitedHealth Group is:
14% = US$15b ÷ US$104b (Based on the trailing twelve months to September 2024).
The ‘return’ is the yearly profit. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.14.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.
UnitedHealth Group’s Earnings Growth And 14% ROE
To start with, UnitedHealth Group’s ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 13%. Despite the moderate return on equity, UnitedHealth Group has posted a net income growth of 4.9% over the past five years. So, there could be some other factors at play that could be impacting the company’s growth. For instance, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
Next, on comparing UnitedHealth Group’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 5.0% over the last few years.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is UnitedHealth Group fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is UnitedHealth Group Using Its Retained Earnings Effectively?
Despite having a normal three-year median payout ratio of 31% (or a retention ratio of 69% over the past three years, UnitedHealth Group has seen very little growth in earnings as we saw above. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Additionally, UnitedHealth Group 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 over the next three years is expected to be approximately 30%. However, UnitedHealth Group’s ROE is predicted to rise to 26% despite there being no anticipated change in its payout ratio.
Conclusion
Overall, we are quite pleased with UnitedHealth Group’s performance. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
