Should Weakness in Al Rajhi Company for Cooperative Insurance's (TADAWUL:8230) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

Al Rajhi Company for Cooperative Insurance (TADAWUL:8230) has had a rough three months with its share price down 12%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Al Rajhi Company for 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How To Calculate Return On Equity?

Return on equity 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 Al Rajhi Company for Cooperative Insurance is:

14% = ر.س312m ÷ ر.س2.2b (Based on the trailing twelve months to March 2025).

The 'return' is the income the business earned over the last year. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.14.

See our latest analysis for Al Rajhi Company for Cooperative Insurance

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 Al Rajhi Company for Cooperative Insurance's Earnings Growth And 14% ROE

As you can see, Al Rajhi Company for Cooperative Insurance's ROE looks pretty weak. Still, the company's ROE is higher than the average industry ROE of 6.2% so that's certainly interesting. Even more so, after seeing Al Rajhi Company for Cooperative Insurance's exceptional 22% net income growth over the past five years. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. Such as high earnings retention or an efficient management in place.

We then compared Al Rajhi Company for Cooperative Insurance's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 29% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. 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 Al Rajhi Company for Cooperative Insurance is trading on a high P/E or a low P/E, relative to its industry.

Is Al Rajhi Company for Cooperative Insurance Efficiently Re-investing Its Profits?

Given that Al Rajhi Company for Cooperative Insurance doesn't pay any regular dividends to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

On the whole, we do feel that Al Rajhi Company for Cooperative Insurance has some positive attributes. Specifically, we like that the company is reinvesting a huge chunk of its profits at a respectable rate of return. This of course has caused the company to see a good amount of growth in its earnings. 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. Our risks dashboard would have the 2 risks we have identified for Al Rajhi Company for Cooperative Insurance.

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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.