Are Dubai Insurance Company (P.S.C.)'s (DFM:DIN) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

It is hard to get excited after looking at Dubai Insurance Company (P.S.C.)'s (DFM:DIN) recent performance, when its stock has declined 2.7% over the past week. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Dubai Insurance Company (P.S.C.)'s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Dubai 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 Dubai Insurance Company (P.S.C.) is:

11% = د.إ55m ÷ د.إ522m (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every AED1 worth of shareholders' equity, the company generated AED0.11 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of Dubai Insurance Company (P.S.C.)'s Earnings Growth And 11% ROE

It is quite clear that Dubai Insurance Company (P.S.C.)'s ROE is rather low. Further, we noted that the company's ROE is similar to the industry average of 9.8%. As a result, Dubai Insurance Company (P.S.C.)'s decent 17% net income growth seen over the past five years bodes well with us. Given the low ROE, it is likely that there could be some other aspects that are driving this growth as well. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Dubai Insurance Company (P.S.C.)'s net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 16% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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 Dubai Insurance Company (P.S.C.) is trading on a high P/E or a low P/E, relative to its industry.

Is Dubai Insurance Company (P.S.C.) Using Its Retained Earnings Effectively?

Dubai Insurance Company (P.S.C.) has a significant three-year median payout ratio of 55%, meaning that it is left with only 45% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, Dubai 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 Dubai 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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Dubai Insurance Company (P.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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