Emirates Insurance Company P.J.S.C.'s (ADX:EIC) Stock's Been Going Strong: Could Weak Financials Mean The Market Will Correct Its Share Price?

Emirates Insurance Company P.J.S.C's (ADX:EIC) stock is up by a considerable 32% over the past month. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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

How Do You Calculate Return On Equity?

The formula for ROE 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:

3.0% = د.إ33m ÷ د.إ1.1b (Based on the trailing twelve months to September 2022).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every AED1 worth of equity, the company was able to earn AED0.03 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Emirates Insurance Company P.J.S.C's Earnings Growth And 3.0% ROE

It is quite clear that Emirates Insurance Company P.J.S.C's ROE is rather low. Even compared to the average industry ROE of 4.8%, the company's ROE is quite dismal. Given the circumstances, the significant decline in net income by 12% seen by Emirates Insurance Company P.J.S.C over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

That being said, we compared Emirates Insurance Company P.J.S.C's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 12% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Efficiently Re-investing Its Profits?

Emirates Insurance Company P.J.S.C has a high three-year median payout ratio of 96% (that is, it is retaining 4.1% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. You can see the 4 risks we have identified for Emirates Insurance Company P.J.S.C by visiting our risks dashboard for free on our platform here.

In addition, Emirates Insurance Company P.J.S.C has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

Overall, we would be extremely cautious before making any decision on Emirates Insurance Company P.J.S.C. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.