Is Al Khaleej Takaful Insurance Company Q.P.S.C.'s (DSM:AKHI) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Al Khaleej Takaful Insurance Company Q.P.S.C (DSM:AKHI) has had a great run on the share market with its stock up by a significant 13% over the last month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Al Khaleej Takaful Insurance Company Q.P.S.C's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Al Khaleej Takaful Insurance Company Q.P.S.C

How To 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 Al Khaleej Takaful Insurance Company Q.P.S.C is:

11% = ر.ق60m ÷ ر.ق562m (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every QAR1 worth of equity, the company was able to earn QAR0.11 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. 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.

Al Khaleej Takaful Insurance Company Q.P.S.C's Earnings Growth And 11% ROE

It is quite clear that Al Khaleej Takaful Insurance Company Q.P.S.C's ROE is rather low. Even when compared to the industry average of 13%, the ROE figure is pretty disappointing. Al Khaleej Takaful Insurance Company Q.P.S.C was still able to see a decent net income growth of 17% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. Such as - high earnings retention or an efficient management in place.

We then compared Al Khaleej Takaful Insurance Company Q.P.S.C'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 11% in the same 5-year period.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Al Khaleej Takaful Insurance Company Q.P.S.C's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Al Khaleej Takaful Insurance Company Q.P.S.C Making Efficient Use Of Its Profits?

Al Khaleej Takaful Insurance Company Q.P.S.C has a three-year median payout ratio of 43%, which implies that it retains the remaining 57% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, Al Khaleej Takaful Insurance Company Q.P.S.C is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

In total, it does look like Al Khaleej Takaful Insurance Company Q.P.S.C has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 1 risk we have identified for Al Khaleej Takaful Insurance Company Q.P.S.C visit our risks dashboard for free.

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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.