Can mixed fundamentals negatively impact current stock price dynamics of HCI Group, Inc. (NYSE: HCI)?
HCI Group (NYSE: HCI) shares have risen 15% in the past three months. However, we have decided to pay attention to the fundamentals of the company which do not seem to give a clear sign on the financial health of the company. Specifically, we have decided to study the ROE of HCI Group in this article.
Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how efficiently their capital is being reinvested. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
Discover our latest analysis for HCI Group
How to calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of the HCI group is:
9.4% = US $ 29 million ÷ US $ 306 million (based on the last twelve months to June 2021).
“Return” refers to a company’s profits over the past year. This means that for every dollar in shareholders’ equity, the company generated $ 0.09 in profit.
What is the relationship between ROE and profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. We now need to assess how much profit the business is reinvesting or “holding back” for future growth, which then gives us an idea of the growth potential of the business. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of HCI Group’s 9.4% profit growth and ROE
At first glance, HCI Group’s ROE is not much to say. Then, compared to the industry average ROE of 12%, the company’s ROE leaves us even less enthusiastic. As a result, HCI Group has recorded very low revenue growth of 4.0% over the past five years.
We then compared the HCI group’s net income growth with the industry and found that the company’s growth figure is lower than the industry average growth rate of 13% over the same period. which is a bit disturbing.
Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. If you’re wondering about HCI Group’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.
Is HCI Group Using Profits Efficiently?
Despite a normal three-year median payout rate of 48% (or a retention rate of 52% over the past three years, the HCI Group has experienced very little profit growth, as we have seen below- above. Therefore, there could be other reasons for the lack in this regard. For example, the business could be in decline.
Additionally, HCI Group has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth.
Overall, we believe that the performance displayed by HCI Group can be open to many interpretations. Although the company has a high rate of profit retention, its low rate of return is likely to hamper its profit growth. However, according to the latest forecast from industry analysts, the company’s profits are expected to decline in the future. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
If you decide to trade with HCI Group, use the cheapest platform * which is ranked # 1 overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, currencies, bonds and funds in 135 markets, all from one integrated account.Promoted