UnitedHealth Group Incorporated (NYSE:UNH) Stock Is Down, But Fundamentals Look Strong: Is the Market Wrong?

UnitedHealth Group (NYSE:UNH) had a difficult month, with shares down 3.7%. However, stock prices are usually determined by a company's long-term financial performance, which in this case looks quite promising. Specifically, we decided to examine 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. In other words, it shows the company's success in converting shareholder investments into profits.

Check out our latest analysis for UnitedHealth Group

How do you calculate return on equity?

The Return on equity formula Is:

Return on equity = net profit (from continuing operations) ÷ equity

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

14% = $15 billion ÷ $104 billion (Based on trailing twelve months ending September 2024).

The “return” is the profit over the last twelve months. So this means that for every dollar that its shareholders invest, 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 reinvests or “retains”, we can then evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher a company's growth rate will be compared to companies that don't necessarily share these characteristics.

UnitedHealth Group earnings growth and 14% ROE

First of all, UnitedHealth Group appears to have a respectable ROE. Furthermore, the company's ROE of 13% is in line with the industry average. Despite the moderate return on equity, UnitedHealth Group posted net income growth of 4.9% over the past five years. We believe that low growth with moderate returns could be due to certain circumstances, such as low profit retention or poor capital allocation.

We then conducted a comparison between UnitedHealth Group's net income growth and the industry. It showed that the company's growth was similar to the average industry 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 find out whether the expected growth or decline in earnings (as the case may be) is priced in. This then helps him determine whether the stock is suitable for a bright or bleak 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. Therefore, you should check whether UnitedHealth Group has a high P/E or a low P/E relative to its industry.

Is UnitedHealth Group reinvesting its profits efficiently?

Despite a normal three-year average payout ratio of 31% (or a retention ratio of 69% over the last three years), UnitedHealth Group has seen very little earnings growth, as we saw above. So there could be another explanation for this. For example, the company's business could deteriorate.

Additionally, UnitedHealth Group has paid dividends for at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of business growth. Based on the latest analyst estimates, we found that the company's future payout ratio is expected to remain stable at 30% over the next three years. Separately, UnitedHealth Group's future ROE is forecast to rise to 26%, although no major changes are expected in the payout ratio.

Summary

Overall, we are quite satisfied with UnitedHealth Group's performance. We particularly like that the company reinvests a large portion of its profits at a high rate of return. Of course, this has resulted in the company posting significant earnings growth. However, recent analyst forecasts suggest that the company will continue to grow its profits. For more information on the company's future earnings growth forecasts, click here free Check out analyst forecasts for the company to find out more.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.