Is The Market Wrong About CNA Financial Corporation (NYSE:CNA)?

It is hard to get excited after looking at CNA Financial’s (NYSE:CNA) recent performance, when its stock has declined 2.0% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study CNA Financial’s ROE in this article.

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ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

Check out our latest analysis for CNA Financial

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

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So, based on the above formula, the ROE for CNA Financial is:

12% = US$1.3b ÷ US$11b (Based on the trailing twelve months to September 2024).

The ‘return’ refers to a company’s earnings over the last year. That means that for every $1 worth of shareholders’ equity, the company generated $0.12 in profit.

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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

To start with, CNA Financial’s ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. This certainly adds some context to CNA Financial’s moderate 9.9% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that CNA Financial’s reported growth was lower than the industry growth of 13% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is CNA fairly valued? This infographic on the company’s intrinsic value has everything you need to know.

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With a three-year median payout ratio of 38% (implying that the company retains 62% of its profits), it seems that CNA Financial is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that’s well covered.

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