Is HAYAH Insurance Company P.J.S.C.'s (ADX:HAYAH) Stock Price Struggling As A Result Of Its Mixed Financials?

HAYAH Insurance Company P.J.S.C (ADX:HAYAH) has had a rough three months with its share price down 14%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to HAYAH Insurance Company P.J.S.C's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for HAYAH Insurance Company P.J.S.C

How To Calculate Return On Equity?

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

0.7% = د.إ935k ÷ د.إ125m (Based on the trailing twelve months to September 2024).

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 AED0.01 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of HAYAH Insurance Company P.J.S.C's Earnings Growth And 0.7% ROE

It is quite clear that HAYAH Insurance Company P.J.S.C's ROE is rather low. Even when compared to the industry average of 8.9%, the ROE figure is pretty disappointing. Given the circumstances, the significant decline in net income by 8.6% seen by HAYAH Insurance Company P.J.S.C over the last five years is not surprising. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate of 3.0% over the last few years, we found that HAYAH Insurance Company P.J.S.C's performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about HAYAH Insurance Company P.J.S.C's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

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

Because HAYAH Insurance Company P.J.S.C doesn't pay any regular dividends, we infer that it is retaining all of its profits, which is rather perplexing when you consider the fact that there is no earnings growth to show for it. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Summary

Overall, we have mixed feelings about HAYAH Insurance Company P.J.S.C. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 2 risks we have identified for HAYAH Insurance Company P.J.S.C visit our risks dashboard for free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.