Can Fundamentals Push United Fidelity Insurance Company (PSC)'s (ADX:FIDELITYUNITED) Stock Prices Higher?

It is easy to overlook United Fidelity Insurance Company (PSC)'s (ADX:FIDELITYUNITED) given its unimpressive and roughly flat price performance over the past week. However, the company's key financials probably have more to say so you may want to give the company a closer look given that stock prices usually follow the long-term financial performance of a business. In this article, we decided to focus on United Fidelity Insurance Company (PSC)'s ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for United Fidelity Insurance Company (PSC)

How Do You Calculate Return On Equity?

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 United Fidelity Insurance Company (PSC) is:

4.4% = د.إ2.9m ÷ د.إ67m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each AED1 of shareholders' capital it has, the company made AED0.04 in profit.

Why Is ROE Important For 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

United Fidelity Insurance Company (PSC)'s Earnings Growth And 4.4% ROE

As you can see, United Fidelity Insurance Company (PSC)'s ROE looks pretty weak. Not just that, even compared to the industry average of 11%, the company's ROE is entirely unremarkable. In spite of this, United Fidelity Insurance Company (PSC) was able to grow its net income considerably, at a rate of 66% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared United Fidelity Insurance Company (PSC)'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 14%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about United Fidelity Insurance Company (PSC)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is United Fidelity Insurance Company (PSC) Using Its Retained Earnings Effectively?

United Fidelity Insurance Company (PSC) doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

In total, it does look like United Fidelity Insurance Company (PSC) 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. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 2 risks we have identified for United Fidelity Insurance Company (PSC) visit our risks dashboard for free.

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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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