Are Robust Financials Driving The Recent Rally In Al-Etihad Cooperative Insurance Co.'s (TADAWUL:8170) Stock?

Al-Etihad Cooperative Insurance's (TADAWUL:8170) stock is up by a considerable 27% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Al-Etihad Cooperative Insurance's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Al-Etihad Cooperative Insurance

How To 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 Al-Etihad Cooperative Insurance is:

15% = ر.س84m ÷ ر.س551m (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 SAR0.15 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Al-Etihad Cooperative Insurance's Earnings Growth And 15% ROE

When you first look at it, Al-Etihad Cooperative Insurance's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 9.3% which we definitely can't overlook. This certainly adds some context to Al-Etihad Cooperative Insurance's moderate 16% net income growth seen over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.

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

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. 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 Al-Etihad Cooperative Insurance is trading on a high P/E or a low P/E, relative to its industry.

Is Al-Etihad Cooperative Insurance Making Efficient Use Of Its Profits?

Conclusion

In total, we are pretty happy with Al-Etihad Cooperative Insurance's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 2 risks we have identified for Al-Etihad Cooperative Insurance 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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