Declining Stock and Decent Financials: Is The Market Wrong About Emirates Insurance Company P.J.S.C. (ADX:EIC)?

It is hard to get excited after looking at Emirates Insurance Company P.J.S.C’s (ADX:EIC) recent performance, when its stock has declined 2.9% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Emirates Insurance Company P.J.S.C’s ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Emirates Insurance Company P.J.S.C

How Is ROE Calculated?

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 Emirates Insurance Company P.J.S.C is:

15% = د.إ138m ÷ د.إ949m (Based on the trailing twelve months to June 2020).

The ‘return’ is the income the business earned over the last year. So, this means that for every AED1 of its shareholder’s investments, the company generates a profit of AED0.15.

What Is The Relationship Between ROE And Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. 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.

Emirates Insurance Company P.J.S.C’s Earnings Growth And 15% ROE

At first glance, Emirates Insurance Company P.J.S.C’s ROE doesn’t look very promising. However, the fact that the company’s ROE is higher than the average industry ROE of 10%, is definitely interesting. This probably goes some way in explaining Emirates Insurance Company P.J.S.C’s moderate 9.0% growth over the past five years amongst other factors. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So there might well be other reasons for the earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

We then compared Emirates Insurance Company P.J.S.C’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 13% in the same period, which is a bit concerning.

past-earnings-growth
ADX:EIC Past Earnings Growth September 24th 2020

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). Doing so will help them establish if the stock’s future looks promising or ominous. Is Emirates Insurance Company P.J.S.C fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Emirates Insurance Company P.J.S.C Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 72% (or a retention ratio of 28%) for Emirates Insurance Company P.J.S.C suggests that the company’s growth wasn’t really hampered despite it returning most of its income to its shareholders.

Moreover, Emirates Insurance Company P.J.S.C 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.

Summary

On the whole, we do feel that Emirates Insurance Company P.J.S.C has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely achieved by the company reinvesting its earnings at a decent rate of return. Still, its earnings retention is quite low, so we wonder if the company’s growth could be higher, were it to pay out less dividends and retain more of its profits? Until now, we have only just grazed the surface of the company’s past performance by looking at the company’s fundamentals. To gain further insights into Emirates Insurance Company P.J.S.C’s past profit growth, check out this visualization of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. 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.
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