Is Dubai National Insurance & Reinsurance Co. (P.S.C.)'s (DFM:DNIR) Stock On A Downtrend As A Result Of Its Poor Financials?

Dubai National Insurance & Reinsurance (P.S.C.) (DFM:DNIR) has had a rough three months with its share price down 30%. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. In this article, we decided to focus on Dubai National Insurance & Reinsurance (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 Dubai National Insurance & Reinsurance (P.S.C.)

How Do You 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 National Insurance & Reinsurance (P.S.C.) is:

7.2% = د.إ44m ÷ د.إ609m (Based on the trailing twelve months to September 2022).

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 AED0.07 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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 National Insurance & Reinsurance (P.S.C.)'s Earnings Growth And 7.2% ROE

As you can see, Dubai National Insurance & Reinsurance (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 6.6%. Dubai National Insurance & Reinsurance (P.S.C.)'s flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Dubai National Insurance & Reinsurance (P.S.C.)'s net income growth with the industry and found that the average industry growth rate was 12% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Dubai National Insurance & Reinsurance (P.S.C.)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Dubai National Insurance & Reinsurance (P.S.C.) Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 68% (implying that the company keeps only 32% of its income) of its business to reinvest into its business), most of Dubai National Insurance & Reinsurance (P.S.C.)'s profits are being paid to shareholders, which explains the absence of growth in earnings.

Additionally, Dubai National Insurance & Reinsurance (P.S.C.) has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we would be extremely cautious before making any decision on Dubai National Insurance & Reinsurance (P.S.C.). 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. You can do your own research on Dubai National Insurance & Reinsurance (P.S.C.) and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.