Arabian Scandinavian Insurance Company (PLC) - Takaful - ASCANA Insurance's (DFM:ASCANA) Financials Look Pretty Bleak: Is That Why The Stock Hasn't Performed So Well?

Arabian Scandinavian Insurance Company (PLC) - Takaful - ASCANA Insurance's (DFM:ASCANA) stock was mostly flat over the past three months. However, its financials look weak which could potentially mean that its stock could show weakness in the future given that stock performances are usually attached to a company's financial health in the long-term. Particularly, we will be paying attention to Arabian Scandinavian Insurance Company (PLC) - Takaful - ASCANA Insurance's ROE today.

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.

View our latest analysis for Arabian Scandinavian Insurance Company (PLC) - Takaful - ASCANA Insurance

How Is ROE Calculated?

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 Arabian Scandinavian Insurance Company (PLC) - Takaful - ASCANA Insurance is:

2.5% = د.إ7.9m ÷ د.إ321m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each AED1 of shareholders' capital it has, the company made AED0.02 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Arabian Scandinavian Insurance Company (PLC) - Takaful - ASCANA Insurance's Earnings Growth And 2.5% ROE

It is hard to argue that Arabian Scandinavian Insurance Company (PLC) - Takaful - ASCANA Insurance'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. Given the circumstances, the significant decline in net income by 19% seen by Arabian Scandinavian Insurance Company (PLC) - Takaful - ASCANA Insurance over the last five years is not surprising. We reckon that there could also be other factors at play here. 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 Arabian Scandinavian Insurance Company (PLC) - Takaful - ASCANA Insurance'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.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Arabian Scandinavian Insurance Company (PLC) - Takaful - ASCANA Insurance's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Arabian Scandinavian Insurance Company (PLC) - Takaful - ASCANA Insurance 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.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Arabian Scandinavian Insurance Company (PLC) - Takaful - ASCANA Insurance. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Arabian Scandinavian Insurance Company (PLC) - Takaful - ASCANA Insurance's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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