Allied Cooperative Insurance Group's (TADAWUL:8150) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Allied Cooperative Insurance Group (TADAWUL:8150) has had a great run on the share market with its stock up by a significant 50% 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 Allied Cooperative Insurance Group's ROE in this article.

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.

View our latest analysis for Allied Cooperative Insurance Group

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Allied Cooperative Insurance Group is:

3.4% = ر.س5.1m ÷ ر.س152m (Based on the trailing twelve months to September 2020).

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 SAR0.03 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. 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 Allied Cooperative Insurance Group's Earnings Growth And 3.4% ROE

As you can see, Allied Cooperative Insurance Group's ROE looks pretty weak. Even compared to the average industry ROE of 9.3%, the company's ROE is quite dismal. Given the circumstances, the significant decline in net income by 33% seen by Allied Cooperative Insurance Group over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

However, when we compared Allied Cooperative Insurance Group's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 0.3% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Allied Cooperative Insurance Group is trading on a high P/E or a low P/E, relative to its industry.

Is Allied Cooperative Insurance Group Efficiently Re-investing Its Profits?

Summary

On the whole, we feel that the performance shown by Allied Cooperative Insurance Group can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 2 risks we have identified for Allied Cooperative Insurance Group by visiting our risks dashboard for free on our platform here.

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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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