Is Weakness In Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München (ETR:MUV2) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

It is hard to get excited after looking at Münchener Rückversicherungs-Gesellschaft in München's (ETR:MUV2) recent performance, when its stock has declined 3.4% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Münchener Rückversicherungs-Gesellschaft in München'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

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 Münchener Rückversicherungs-Gesellschaft in München is:

14% = €4.7b ÷ €33b (Based on the trailing twelve months to March 2025).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.14 in profit.

View our latest analysis for Münchener Rückversicherungs-Gesellschaft in München

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Münchener Rückversicherungs-Gesellschaft in München's Earnings Growth And 14% ROE

To begin with, Münchener Rückversicherungs-Gesellschaft in München seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 15%. This certainly adds some context to Münchener Rückversicherungs-Gesellschaft in München's exceptional 24% net income growth seen over the past five years. However, there could also be other drivers behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Münchener Rückversicherungs-Gesellschaft in München'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 12%.

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). This then helps them determine if the stock is placed for a bright or bleak future. Is Münchener Rückversicherungs-Gesellschaft in München fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Münchener Rückversicherungs-Gesellschaft in München Efficiently Re-investing Its Profits?

Münchener Rückversicherungs-Gesellschaft in München has a three-year median payout ratio of 35% (where it is retaining 65% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Münchener Rückversicherungs-Gesellschaft in München is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Münchener Rückversicherungs-Gesellschaft in München has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 47% over the next three years. Regardless, the future ROE for Münchener Rückversicherungs-Gesellschaft in München is speculated to rise to 17% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Summary

In total, we are pretty happy with Münchener Rückversicherungs-Gesellschaft in München's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.