It is hard to get excited after looking at Employers Holdings' (NYSE:EIG) recent performance, when its stock has declined 2.2% over the past month. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Employers Holdings' 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How Is ROE Calculated?

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 Employers Holdings is:

11% = US$119m ÷ US$1.1b (Based on the trailing twelve months to December 2024).

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 $0.11 in profit.

See our latest analysis for Employers Holdings

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of Employers Holdings' Earnings Growth And 11% ROE

To begin with, Employers Holdings seems to have a respectable ROE. Even so, when compared with the average industry ROE of 15%, we aren't very excited. Further, Employers Holdings' five year net income growth of -0.1% is more or less flat. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. Therefore, the flat earnings growth could be the result of other factors. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitve pressures.

As a next step, we compared Employers Holdings' net income growth with the industry and discovered that the industry saw an average growth of 12% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. 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 Employers Holdings is trading on a high P/E or a low P/E, relative to its industry.

Is Employers Holdings Efficiently Re-investing Its Profits?

Employers Holdings' low three-year median payout ratio of 25% (implying that the company keeps75% of its income) should mean that the company is retaining most of its earnings to fuel its growth and this should be reflected in its growth number, but that's not the case.

Additionally, Employers Holdings 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. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 36% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 7.0%) over the same period.

Conclusion

In total, it does look like Employers Holdings has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate 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. Moreover, after studying current analyst estimates, we discovered that the company's earnings are expected to continue to shrink in the future. 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.

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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.