UnitedHealth Group Incorporated’s ( NYSE:UNH ) stock is down, but fundamentals look strong: Is the market wrong?

UnitedHealth Group (NYSE:UNH) has had a rough month with its share price down 3.7 percent. However, stock prices are usually driven by a company’s long-term financial performance, which in this case looks quite promising. Specifically, we decided to study UnitedHealth Group’s ROE in this article.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. Put another way, it reveals the company’s success in turning shareholder investment into profits.

See our latest analysis for UnitedHealth Group

How do you calculate return on equity?

The formula for return on equity is:

Return on equity = Net profit (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for UnitedHealth Group is:

14% = 15 billion USD ÷ 104 billion USD (Based on last 12 months to September 2024).

The ‘return’ is the profit over the past 12 months. So this means that for every $1 of its shareholder’s investment, the company generates a profit of $0.14.

What does ROE have to do with earnings growth?

So far we have learned that ROE measures how efficiently a company generates its profits. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that do not necessarily carry these characteristics.

UnitedHealth Group’s earnings growth and 14% return on equity

For starters, UnitedHealth Group appears to have a respectable ROE. Furthermore, the company’s ROE corresponds to the industry average of 13%. Despite the moderate return on equity, UnitedHealth Group has had net income growth of 4.9% over the past five years. We expect that low growth when returns are moderate may be the result of certain circumstances such as low earnings or poor allocation of capital.

We then compared UnitedHealth Group’s net income growth to the industry, revealing that the company’s growth is similar to the industry average growth of 5.0% over the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to determine whether the expected growth or decline in earnings, as the case may be, is priced in. This then helps them determine whether the stock is positioned for a bright or gloomy future. A 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 might want to check whether UnitedHealth Group is trading at a high P/E or a low P/E relative to its industry.

Is UnitedHealth Group effectively reinvesting its profits?

Despite having a normal three-year median payout ratio of 31% (or a retention rate of 69% over the past three years, UnitedHealth Group has seen very little growth in earnings, as we saw above. So there may be another explanation for that For for example, the company’s business may deteriorate.

In addition, UnitedHealth Group has paid dividends over a period of at least ten years, suggesting that it is far more important for management to stop dividend payments, even if it comes at the expense of business growth. Based on the latest analysts’ estimates, we found that the company’s future payout percentage over the next three years is expected to remain stable at 30%. Regardless, UnitedHealth Group’s future ROE is expected to rise to 26% despite not expecting much change in its payout ratio.

Overview

Overall, we are quite satisfied with UnitedHealth Group’s performance. Specifically, we like that the company reinvests a large portion of the profits for a high return. This has naturally resulted in the company experiencing a nice growth in earnings. That being the case, the latest analyst forecasts show that the company will continue to see an expansion in earnings. To know more about the company’s future earnings growth forecasts, take a look at this free analyst forecast reports for the company to find out more.

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This article by Simply Wall St is general. We only provide commentary based on historical data and analyst forecasts 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 shares and does not take into account your goals or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account recent price-sensitive company announcements or qualitative material. Simply Wall St has no position in any listed stocks.