New Zealand markets closed
  • NZX 50

    11,103.79
    -21.45 (-0.19%)
     
  • NZD/USD

    0.5642
    -0.0022 (-0.38%)
     
  • NZD/EUR

    0.5768
    -0.0011 (-0.19%)
     
  • ALL ORDS

    6,976.10
    -57.40 (-0.82%)
     
  • ASX 200

    6,762.80
    -54.70 (-0.80%)
     
  • OIL

    89.81
    +1.36 (+1.54%)
     
  • GOLD

    1,717.20
    -3.60 (-0.21%)
     
  • NASDAQ

    11,485.50
    -87.68 (-0.76%)
     
  • FTSE

    7,020.20
    +22.93 (+0.33%)
     
  • Dow Jones

    29,926.94
    -346.93 (-1.15%)
     
  • DAX

    12,485.14
    +14.36 (+0.12%)
     
  • Hang Seng

    17,740.05
    -272.10 (-1.51%)
     
  • NIKKEI 225

    27,116.11
    -195.19 (-0.71%)
     
  • NZD/JPY

    81.7070
    -0.4220 (-0.51%)
     

Are Robust Financials Driving The Recent Rally In Kinsale Capital Group, Inc.'s (NYSE:KNSL) Stock?

·4-min read

Kinsale Capital Group (NYSE:KNSL) has had a great run on the share market with its stock up by a significant 35% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Kinsale Capital Group's ROE in this article.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Kinsale Capital Group

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 Kinsale Capital Group is:

23% = US$144m ÷ US$634m (Based on the trailing twelve months to June 2022).

The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.23 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Kinsale Capital Group's Earnings Growth And 23% ROE

Firstly, we acknowledge that Kinsale Capital Group has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 11% which is quite remarkable. Under the circumstances, Kinsale Capital Group's considerable five year net income growth of 37% was to be expected.

As a next step, we compared Kinsale Capital Group's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 14%.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Kinsale Capital Group is trading on a high P/E or a low P/E, relative to its industry.

Is Kinsale Capital Group Efficiently Re-investing Its Profits?

Kinsale Capital Group has a really low three-year median payout ratio of 9.1%, meaning that it has the remaining 91% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, Kinsale Capital Group is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 7.1% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

In total, we are pretty happy with Kinsale Capital Group's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here