Stock Analysis

Dubai Islamic Insurance & Reinsurance Co. (Aman) (P.J.S.C)'s (DFM:AMAN) Stock Is Going Strong: Is the Market Following Fundamentals?

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DFM:AMAN
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Dubai Islamic Insurance & Reinsurance (Aman) (P.J.S.C) (DFM:AMAN) has had a great run on the share market with its stock up by a significant 13% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Dubai Islamic Insurance & Reinsurance (Aman) (P.J.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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Dubai Islamic Insurance & Reinsurance (Aman) (P.J.S.C)

How Do You Calculate Return On Equity?

Return on equity 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 Dubai Islamic Insurance & Reinsurance (Aman) (P.J.S.C) is:

13% = د.إ10m ÷ د.إ76m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every AED1 worth of equity, the company was able to earn AED0.13 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

Dubai Islamic Insurance & Reinsurance (Aman) (P.J.S.C)'s Earnings Growth And 13% ROE

When you first look at it, Dubai Islamic Insurance & Reinsurance (Aman) (P.J.S.C)'s ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 11% which we definitely can't overlook. Especially when you consider Dubai Islamic Insurance & Reinsurance (Aman) (P.J.S.C)'s exceptional 37% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence, there might be some other aspects that are causing earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

As a next step, we compared Dubai Islamic Insurance & Reinsurance (Aman) (P.J.S.C)'s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 14%.

past-earnings-growth
DFM:AMAN Past Earnings Growth January 14th 2021

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 Dubai Islamic Insurance & Reinsurance (Aman) (P.J.S.C)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Dubai Islamic Insurance & Reinsurance (Aman) (P.J.S.C) Making Efficient Use Of Its Profits?

Given that Dubai Islamic Insurance & Reinsurance (Aman) (P.J.S.C) doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, we are pretty happy with Dubai Islamic Insurance & Reinsurance (Aman) (P.J.S.C)'s performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 2 risks we have identified for Dubai Islamic Insurance & Reinsurance (Aman) (P.J.S.C) visit our risks dashboard for free.

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