Has Principal Financial Group, Inc. (NASDAQ:PFG) Stock's Recent Performance Got Anything to Do With Its Financial Health?

Principal Financial Group, Inc. -0.10%
 Principal Financial Group, Inc. PFG 74.7 -0.10%

Most readers would already know that Principal Financial Group's (NASDAQ:PFG) stock increased by 9.7% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Principal Financial Group's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Principal Financial Group

## How To Calculate Return On Equity?

ROE can be calculated by using the formula:

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

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

6.0% = US\$670m ÷ US\$11b (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. So, this means that for every \$1 of its shareholder's investments, the company generates a profit of \$0.06.

## What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

## A Side By Side comparison of Principal Financial Group's Earnings Growth And 6.0% ROE

When you first look at it, Principal Financial Group's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 13% either. However, the moderate 17% net income growth seen by Principal Financial Group over the past five years is definitely a positive. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Principal Financial Group'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 7.8%.

Earnings growth is a huge factor in stock valuation. 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 PFG fairly valued? This infographic on the company's intrinsic value has everything you need to know.

## Is Principal Financial Group Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 39% (implying that the company retains 61% of its profits), it seems that Principal Financial Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Principal Financial Group is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 39%. However, Principal Financial Group's ROE is predicted to rise to 14% despite there being no anticipated change in its payout ratio.

## Conclusion

In total, it does look like Principal Financial Group has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.