Sharjah Insurance Company P.S.C.'s (ADX:SICO) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?

By
Simply Wall St
Published
January 13, 2022
ADX:SICO
Source: Shutterstock

Most readers would already be aware that Sharjah Insurance Company P.S.C's (ADX:SICO) stock increased significantly by 35% over the past week. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. In this article, we decided to focus on Sharjah Insurance Company P.S.C's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Sharjah Insurance Company P.S.C

How To 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:

8.8% = د.إ18m ÷ د.إ209m (Based on the trailing twelve months to September 2021).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every AED1 worth of equity, the company was able to earn AED0.09 in profit.

Why Is ROE Important For 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. 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.

Sharjah Insurance Company P.S.C's Earnings Growth And 8.8% ROE

As you can see, Sharjah Insurance Company P.S.C's ROE looks pretty weak. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 8.3%. Given the low ROE Sharjah Insurance Company P.S.C's five year net income decline of 11% is not surprising.

That being said, we compared Sharjah Insurance Company P.S.C's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 14% in the same period.

past-earnings-growth
ADX:SICO Past Earnings Growth January 13th 2022

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. 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?

With a high three-year median payout ratio of 73% (implying that 27% of the profits are retained), most of Sharjah Insurance Company P.S.C's profits are being paid to shareholders, which explains the company's shrinking earnings. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. To know the 3 risks we have identified for Sharjah Insurance Company P.S.C visit our risks dashboard for free.

In addition, Sharjah Insurance Company P.S.C has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

Overall, we would be extremely cautious before making any decision on Sharjah Insurance Company P.S.C. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Sharjah Insurance Company P.S.C's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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