Arabia Insurance Cooperative Company's (TADAWUL:8160) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Arabia Insurance Cooperative's (TADAWUL:8160) stock is up by a considerable 18% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Arabia Insurance Cooperative'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Arabia Insurance Cooperative

How Is ROE Calculated?

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 Arabia Insurance Cooperative is:

0.9% = ر.س1.9m ÷ ر.س221m (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. That means that for every SAR1 worth of shareholders' equity, the company generated SAR0.01 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Arabia Insurance Cooperative's Earnings Growth And 0.9% ROE

It is hard to argue that Arabia Insurance Cooperative's ROE is much good in and of itself. Even compared to the average industry ROE of 9.3%, the company's ROE is quite dismal. Therefore, it might not be wrong to say that the five year net income decline of 39% seen by Arabia Insurance Cooperative was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

So, as a next step, we compared Arabia Insurance Cooperative's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 0.3% in the same period.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Arabia Insurance Cooperative is trading on a high P/E or a low P/E, relative to its industry.

Is Arabia Insurance Cooperative Using Its Retained Earnings Effectively?

Summary

Overall, we have mixed feelings about Arabia Insurance Cooperative. While the company does have a high rate of profit retention, its low rate of return is probably hampering its 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 1 risk we have identified for Arabia Insurance Cooperative 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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