Stock Analysis

Should Weakness in The Mediterranean and Gulf Cooperative Insurance and Reinsurance Company's (TADAWUL:8030) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

SASE:8030
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With its stock down 8.6% over the past three months, it is easy to disregard Mediterranean and Gulf Cooperative Insurance and Reinsurance (TADAWUL:8030). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Mediterranean and Gulf Cooperative Insurance and Reinsurance'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Mediterranean and Gulf Cooperative Insurance and Reinsurance

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 Mediterranean and Gulf Cooperative Insurance and Reinsurance is:

3.6% = ر.س27m ÷ ر.س756m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.04.

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. 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. 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 Mediterranean and Gulf Cooperative Insurance and Reinsurance's Earnings Growth And 3.6% ROE

It is hard to argue that Mediterranean and Gulf Cooperative Insurance and Reinsurance's ROE is much good in and of itself. Even when compared to the industry average of 9.3%, the ROE figure is pretty disappointing. In spite of this, Mediterranean and Gulf Cooperative Insurance and Reinsurance was able to grow its net income considerably, at a rate of 20% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Mediterranean and Gulf Cooperative Insurance and Reinsurance's growth is quite high when compared to the industry average growth of 0.3% in the same period, which is great to see.

past-earnings-growth
SASE:8030 Past Earnings Growth November 27th 2020

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). This then helps them determine if the stock is placed for a bright or bleak future. Is Mediterranean and Gulf Cooperative Insurance and Reinsurance fairly valued compared to other companies? These 3 valuation measures might help you decide.

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

Mediterranean and Gulf Cooperative Insurance and Reinsurance doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Conclusion

On the whole, we do feel that Mediterranean and Gulf Cooperative Insurance and Reinsurance has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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 Mediterranean and Gulf Cooperative Insurance and Reinsurance 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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