Is Islamic Arab Insurance Co. (Salama) PJSC's (DFM:SALAMA) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

By
Simply Wall St
Published
November 08, 2021
DFM:SALAMA
Source: Shutterstock

Most readers would already be aware that Islamic Arab Insurance (Salama) PJSC's (DFM:SALAMA) stock increased significantly by 12% over the past week. 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 Islamic Arab Insurance (Salama) PJSC's ROE in this article.

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.

View our latest analysis for Islamic Arab Insurance (Salama) PJSC

How To 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 Islamic Arab Insurance (Salama) PJSC is:

18% = د.إ149m ÷ د.إ851m (Based on the trailing twelve months to June 2021).

The 'return' is the profit over the last twelve months. So, this means that for every AED1 of its shareholder's investments, the company generates a profit of AED0.18.

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. 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. 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.

Islamic Arab Insurance (Salama) PJSC's Earnings Growth And 18% ROE

To start with, Islamic Arab Insurance (Salama) PJSC's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.5%. This probably laid the ground for Islamic Arab Insurance (Salama) PJSC's significant 65% net income growth seen over the past five years. We reckon that there could also be other factors at play here. 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.

We then compared Islamic Arab Insurance (Salama) PJSC's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 12% in the same period.

past-earnings-growth
DFM:SALAMA Past Earnings Growth November 9th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Islamic Arab Insurance (Salama) PJSC fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Islamic Arab Insurance (Salama) PJSC Making Efficient Use Of Its Profits?

Islamic Arab Insurance (Salama) PJSC has a significant three-year median payout ratio of 69%, meaning the company only retains 31% 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, Islamic Arab Insurance (Salama) PJSC only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

Overall, we are quite pleased with Islamic Arab Insurance (Salama) PJSC's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. 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 Islamic Arab Insurance (Salama) PJSC's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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