Arthur J. Gallagher & Co.'s (NYSE:AJG) Stock Been Rising: Are Strong Financials Guiding The Market?
Arthur J. Gallagher's (NYSE:AJG) stock is up by 3.3% over the past week. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Arthur J. Gallagher's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for Arthur J. Gallagher
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 Arthur J. Gallagher is:
12% = US$1.1b ÷ US$9.2b (Based on the trailing twelve months to December 2022).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.12 in profit.
What Has ROE Got To Do With 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Arthur J. Gallagher's Earnings Growth And 12% ROE
At first glance, Arthur J. Gallagher seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 12%. This certainly adds some context to Arthur J. Gallagher's moderate 15% net income growth seen over the past five years.
Next, on comparing Arthur J. Gallagher's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 14% in the same period.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for AJG? You can find out in our latest intrinsic value infographic research report.
Is Arthur J. Gallagher Efficiently Re-investing Its Profits?
With a three-year median payout ratio of 42% (implying that the company retains 58% of its profits), it seems that Arthur J. Gallagher is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
Additionally, Arthur J. Gallagher has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 22% over the next three years. As a result, the expected drop in Arthur J. Gallagher's payout ratio explains the anticipated rise in the company's future ROE to 23%, over the same period.
In total, we are pretty happy with Arthur J. Gallagher's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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.
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