Declining Stock and Decent Financials: Is The Market Wrong About The Mediterranean and Gulf Cooperative Insurance and Reinsurance Company (TADAWUL:8030)?

Mediterranean and Gulf Cooperative Insurance and Reinsurance (TADAWUL:8030) has had a rough three months with its share price down 14%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Mediterranean and Gulf Cooperative Insurance and Reinsurance's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 Mediterranean and Gulf Cooperative Insurance and Reinsurance

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Mediterranean and Gulf Cooperative Insurance and Reinsurance is:

16% = ر.س161m ÷ ر.س977m (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each SAR1 of shareholders' capital it has, the company made SAR0.16 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Mediterranean and Gulf Cooperative Insurance and Reinsurance's Earnings Growth And 16% ROE

As you can see, Mediterranean and Gulf Cooperative Insurance and Reinsurance's ROE looks pretty weak. However, the fact that it is higher than the industry average of 11% makes us a bit more interested. Having said that, Mediterranean and Gulf Cooperative Insurance and Reinsurance's net income growth over the past five years is more or less flat. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. Therefore, the low to flat growth in earnings could also be the result of this.

As a next step, we compared Mediterranean and Gulf Cooperative Insurance and Reinsurance's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 20% in the same period.

Earnings growth is a huge factor in stock valuation. 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. 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 Mediterranean and Gulf Cooperative Insurance and Reinsurance is trading on a high P/E or a low P/E, relative to its industry.

Is Mediterranean and Gulf Cooperative Insurance and Reinsurance Using Its Retained Earnings Effectively?

Mediterranean and Gulf Cooperative Insurance and Reinsurance doesn't pay any regular dividends, meaning that potentially all of its profits are being reinvested in the business. However, this doesn't explain why the company hasn't seen any growth. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Summary

On the whole, we do feel that Mediterranean and Gulf Cooperative Insurance and Reinsurance has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Mediterranean and Gulf Cooperative Insurance and Reinsurance's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.