The Mediterranean and Gulf Cooperative Insurance and Reinsurance Company's (TADAWUL:8030) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Most readers would already be aware that Mediterranean and Gulf Cooperative Insurance and Reinsurance's (TADAWUL:8030) stock increased significantly by 73% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Mediterranean and Gulf Cooperative Insurance and Reinsurance's ROE.

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

Check out our latest analysis for Mediterranean and Gulf Cooperative Insurance and Reinsurance

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 Mediterranean and Gulf Cooperative Insurance and Reinsurance is:

22% = ر.س201m ÷ ر.س917m (Based on the trailing twelve months to December 2023).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each SAR1 of shareholders' capital it has, the company made SAR0.22 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Mediterranean and Gulf Cooperative Insurance and Reinsurance's Earnings Growth And 22% ROE

When you first look at it, Mediterranean and Gulf Cooperative Insurance and Reinsurance's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 11%, is definitely interesting. But then again, seeing that Mediterranean and Gulf Cooperative Insurance and Reinsurance's net income shrunk at a rate of 4.7% in the past five years, makes us think again. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the decline in earnings could also be the result of this.

However, when we compared Mediterranean and Gulf Cooperative Insurance and Reinsurance's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 4.2% in the same period. This is quite worrisome.

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). Doing so will help them establish if the stock's future looks promising or ominous. 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?

Because Mediterranean and Gulf Cooperative Insurance and Reinsurance doesn't pay any regular dividends, we infer that it is retaining all of its profits, which is rather perplexing when you consider the fact that there is no earnings growth to show for it. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Summary

Overall, we feel that Mediterranean and Gulf Cooperative Insurance and Reinsurance certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the 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. 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.