Stock Analysis

Walaa Cooperative Insurance Company's (TADAWUL:8060) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Walaa Cooperative Insurance (TADAWUL:8060) has had a great run on the share market with its stock up by a significant 18% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Walaa Cooperative Insurance's ROE in this article.

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.

See our latest analysis for Walaa Cooperative Insurance

How To Calculate Return On Equity?

ROE 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 Walaa Cooperative Insurance is:

5.6% = ر.س49m ÷ ر.س881m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every SAR1 worth of shareholders' equity, the company generated SAR0.06 in profit.

What Is The Relationship Between ROE And 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Walaa Cooperative Insurance's Earnings Growth And 5.6% ROE

It is quite clear that Walaa Cooperative Insurance's ROE is rather low. Not just that, even compared to the industry average of 9.3%, the company's ROE is entirely unremarkable. Walaa Cooperative Insurance was still able to see a decent net income growth of 5.3% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Walaa Cooperative Insurance's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 0.3%.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Walaa Cooperative Insurance's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Walaa Cooperative Insurance Efficiently Re-investing Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, we're a bit ambivalent about Walaa Cooperative Insurance's performance. While no doubt its earnings growth is pretty substantial, its ROE and earnings retention is quite poor. So while the company has managed to grow its earnings in spite of this, we are unconvinced if this growth could extend, especially during troubled times. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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