How Good Are First American Financial's Earnings? | Return On Capital Employed

According to Benzinga Pro, during Q2, First American Financial (NYSE:FAF) earned $730.13 million, a 21.4% increase from the preceding quarter. First American Financial also posted a total of $2.27 billion in sales, a 11.85% increase since Q1. In Q1, First American Financial earned $601.42 million, and total sales reached $2.03 billion.

What Is Return On Capital Employed?

Earnings data without context is not clear and can be difficult to base trading decisions on. Return on Capital Employed (ROCE) helps to filter signal from noise by measuring yearly pre-tax profit relative to capital employed by a business. Generally, a higher ROCE suggests successful growth of a company and is a sign of higher earnings per share in the future. In Q2, First American Financial posted an ROCE of 0.14%.

It is important to keep in mind that ROCE evaluates past performance and is not used as a predictive tool. It is a good measure of a company's recent performance, but does not account for factors that could affect earnings and sales in the near future.

ROCE is a powerful metric for comparing the effectiveness of capital allocation for similar companies. A relatively high ROCE shows First American Financial is potentially operating at a higher level of efficiency than other companies in its industry. If the company is generating high profits with its current level of capital, some of that money can be reinvested in more capital which will generally lead to higher returns and, ultimately, earnings per share (EPS) growth.

For First American Financial, the positive return on capital employed ratio of 0.14% suggests that management is allocating their capital effectively. Effective capital allocation is a positive indicator that a company will achieve more durable success and favorable long-term returns.

Analyst Predictions

First American Financial reported Q2 earnings per share at $2.13/share, which beat analyst predictions of $1.7/share.