Investors Title (NASDAQ:ITIC) has had a great run on the share market with its stock up by a significant 18% over the last month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Investors Title'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Investors Title
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Investors Title is:
18% = US$42m ÷ US$233m (Based on the trailing twelve months to June 2022).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.18 in profit.
Why Is ROE Important For 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.
A Side By Side comparison of Investors Title's Earnings Growth And 18% ROE
To start with, Investors Title's ROE looks acceptable. On comparing with the average industry ROE of 11% the company's ROE looks pretty remarkable. Probably as a result of this, Investors Title was able to see an impressive net income growth of 23% over the last five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing with the industry net income growth, we found that Investors Title's growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Investors Title is trading on a high P/E or a low P/E, relative to its industry.
Is Investors Title Efficiently Re-investing Its Profits?
Investors Title's ' three-year median payout ratio is on the lower side at 8.4% implying that it is retaining a higher percentage (92%) of its profits. So it looks like Investors Title is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Moreover, Investors Title is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.
Overall, we are quite pleased with Investors Title'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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 2 risks we have identified for Investors Title by visiting our risks dashboard for free on our platform here.
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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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