National Takaful Company (Watania) P.J.S.C.'s (ADX:WATANIA) Stock Is Going Strong: Is the Market Following Fundamentals?

National Takaful Company (Watania) P.J.S.C (ADX:WATANIA) has had a great run on the share market with its stock up by a significant 7.4% over the last month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study National Takaful Company (Watania) P.J.S.C's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for National Takaful Company (Watania) P.J.S.C

How Do You 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 National Takaful Company (Watania) P.J.S.C is:

22% = د.إ21m ÷ د.إ94m (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 AED0.22 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of National Takaful Company (Watania) P.J.S.C's Earnings Growth And 22% ROE

To start with, National Takaful Company (Watania) P.J.S.C's ROE looks acceptable. On comparing with the average industry ROE of 11% the company's ROE looks pretty remarkable. This certainly adds some context to National Takaful Company (Watania) P.J.S.C's exceptional 71% net income growth seen over the past five years. However, there could also be other causes behind this 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.

Next, on comparing with the industry net income growth, we found that National Takaful Company (Watania) P.J.S.C's growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. 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 National Takaful Company (Watania) P.J.S.C is trading on a high P/E or a low P/E, relative to its industry.

Is National Takaful Company (Watania) P.J.S.C Using Its Retained Earnings Effectively?

National Takaful Company (Watania) P.J.S.C has a significant three-year median payout ratio of 74%, meaning the company only retains 26% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Along with seeing a growth in earnings, National Takaful Company (Watania) P.J.S.C only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

Overall, we are quite pleased with National Takaful Company (Watania) P.J.S.C's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into National Takaful Company (Watania) P.J.S.C's past profit growth, check out this visualization 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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