Can Sharjah Insurance Company P.S.C. (ADX:SICO) Rely On Its Fundamentals For Future Uptrend In Price?

It is easy to overlook Sharjah Insurance Company P.S.C's (ADX:SICO) 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 Sharjah Insurance Company P.S.C'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.

See our latest analysis for Sharjah Insurance Company P.S.C

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 Sharjah Insurance Company P.S.C is:

3.4% = د.إ5.9m ÷ د.إ171m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each AED1 of shareholders' capital it has, the company made AED0.03 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Sharjah Insurance Company P.S.C's Earnings Growth And 3.4% ROE

It is hard to argue that Sharjah Insurance Company P.S.C's ROE is much good in and of itself. Even compared to the average industry ROE of 11%, the company's ROE is quite dismal. Despite this, surprisingly, Sharjah Insurance Company P.S.C saw an exceptional 24% net income growth over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then compared Sharjah Insurance Company P.S.C's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 14% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Sharjah Insurance Company P.S.C's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Sharjah Insurance Company P.S.C Efficiently Re-investing Its Profits?

Sharjah Insurance Company P.S.C's significant three-year median payout ratio of 65% (where it is retaining only 35% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Additionally, Sharjah Insurance Company P.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

Overall, we feel that Sharjah Insurance Company P.S.C certainly does have some positive factors to consider. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. Up till now, we've only made a short study of the company's growth data. You can do your own research on Sharjah 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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