Is Emirates Insurance Company P.J.S.C.'s (ADX:EIC) Recent Stock Performance Influenced By Its Financials In Any Way?

Emirates Insurance Company P.J.S.C's (ADX:EIC) stock up by 4.4% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Particularly, we will be paying attention to Emirates Insurance Company P.J.S.C's ROE today.

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 Is ROE Calculated?

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

15% = د.إ155m ÷ د.إ1.0b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings 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 Has ROE Got To Do With Earnings Growth?

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. 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

On the face of it, Emirates Insurance Company P.J.S.C's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 11% which we definitely can't overlook. This probably goes some way in explaining Emirates Insurance Company P.J.S.C's moderate 12% 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. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.

As a next step, we compared Emirates Insurance Company P.J.S.C's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 14% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Emirates Insurance Company P.J.S.C is trading on a high P/E or a low P/E, relative to its industry.

Is Emirates Insurance Company P.J.S.C Making Efficient Use Of Its Profits?

While Emirates Insurance Company P.J.S.C has a three-year median payout ratio of 72% (which means it retains 28% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Additionally, Emirates Insurance Company P.J.S.C has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we do feel that Emirates Insurance Company P.J.S.C has some positive attributes. Specifically, its respectable ROE which likely led to the considerable growth in earnings. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Emirates Insurance Company P.J.S.C and see how it has performed in the past by looking at this FREE detailed graph 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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