Is Qatar Islamic Insurance Group Q.P.S.C.'s(DSM:QISI) Recent Stock Performance Tethered To Its Strong Fundamentals?

Qatar Islamic Insurance Group Q.P.S.C's (DSM:QISI) stock is up by a considerable 13% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Qatar Islamic Insurance Group Q.P.S.C's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Qatar Islamic Insurance Group Q.P.S.C

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Qatar Islamic Insurance Group Q.P.S.C is:

18% = ر.ق74m ÷ ر.ق420m (Based on the trailing twelve months to March 2021).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each QAR1 of shareholders' capital it has, the company made QAR0.18 in profit.

What Is The Relationship Between ROE And 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. 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.

Qatar Islamic Insurance Group Q.P.S.C's Earnings Growth And 18% ROE

To start with, Qatar Islamic Insurance Group Q.P.S.C's ROE looks acceptable. Especially when compared to the industry average of 7.2% the company's ROE looks pretty impressive. Yet, Qatar Islamic Insurance Group Q.P.S.C has posted measly growth of 2.7% over the past five years. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Qatar Islamic Insurance Group Q.P.S.C compares quite favourably to the industry average, which shows a decline of 12% in the same period.

Earnings growth is a huge factor in stock valuation. 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 Qatar Islamic Insurance Group Q.P.S.C's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Qatar Islamic Insurance Group Q.P.S.C Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 78% (or a retention ratio of 22%), most of Qatar Islamic Insurance Group Q.P.S.C's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Moreover, Qatar Islamic Insurance Group Q.P.S.C has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

In total, we are pretty happy with Qatar Islamic Insurance Group Q.P.S.C's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 1 risk we have identified for Qatar Islamic Insurance Group Q.P.S.C visit our risks dashboard for free.

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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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