Does Ras Al Khaimah National Insurance Company P.S.C.'s (ADX:RAKNIC) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Ras Al Khaimah National Insurance Company P.S.C (ADX:RAKNIC) has had a great run on the share market with its stock up by a significant 21% over the last three months. 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. Particularly, we will be paying attention to Ras Al Khaimah National Insurance Company P.S.C's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Ras Al Khaimah National Insurance Company P.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 Ras Al Khaimah National Insurance Company P.S.C is:

7.1% = د.إ14m ÷ د.إ200m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every AED1 worth of shareholders' equity, the company generated AED0.07 in profit.

What Is The Relationship Between ROE And 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.

Ras Al Khaimah National Insurance Company P.S.C's Earnings Growth And 7.1% ROE

It is hard to argue that Ras Al Khaimah National Insurance Company P.S.C's ROE is much good in and of itself. Not just that, even compared to the industry average of 11%, the company's ROE is entirely unremarkable. Therefore, it might not be wrong to say that the five year net income decline of 15% seen by Ras Al Khaimah National Insurance Company P.S.C was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

So, as a next step, we compared Ras Al Khaimah National Insurance Company P.S.C's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a 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. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Ras Al Khaimah National Insurance Company P.S.C is trading on a high P/E or a low P/E, relative to its industry.

Is Ras Al Khaimah National Insurance Company P.S.C Using Its Retained Earnings Effectively?

While the company did payout a portion of its dividend in the past, it currently doesn't pay a dividend. This implies that potentially all of its profits are being reinvested in the business.

Summary

On the whole, Ras Al Khaimah National Insurance Company P.S.C's performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Ras Al Khaimah National Insurance Company P.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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