Is Chubb Arabia Cooperative Insurance Company's(TADAWUL:8240) Recent Stock Performance Tethered To Its Strong Fundamentals?

Chubb Arabia Cooperative Insurance (TADAWUL:8240) has had a great run on the share market with its stock up by a significant 41% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Chubb Arabia Cooperative Insurance'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.

See our latest analysis for Chubb Arabia Cooperative Insurance

How Do You 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 Chubb Arabia Cooperative Insurance is:

10% = ر.س35m ÷ ر.س345m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

Chubb Arabia Cooperative Insurance's Earnings Growth And 10% ROE

As you can see, Chubb Arabia Cooperative Insurance's ROE looks pretty weak. However, the fact that it is higher than the industry average of 7.8% makes us a bit more interested. Particularly, the modest 6.2% net income growth seen by Chubb Arabia Cooperative Insurance over the past five years is a positive. That being said, the company does have a low ROE to begin with, just that its higher than the industry average. Hence, there might be some other aspects that are causing earnings to grow. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Chubb Arabia Cooperative Insurance's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 2.8% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Chubb Arabia Cooperative Insurance fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Chubb Arabia Cooperative Insurance Using Its Retained Earnings Effectively?

Conclusion

In total, we are pretty happy with Chubb Arabia Cooperative Insurance's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. 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. Our risks dashboard will have the 1 risk we have identified for Chubb Arabia Cooperative Insurance.

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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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