AXA Cooperative Insurance Co.'s (TADAWUL:8250) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 5.7% over the past three months, it is easy to disregard AXA Cooperative Insurance (TADAWUL:8250). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to AXA Cooperative Insurance's ROE today.

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.

See our latest analysis for AXA Cooperative Insurance

How Is ROE Calculated?

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 AXA Cooperative Insurance is:

15% = ر.س128m ÷ ر.س828m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each SAR1 of shareholders' capital it has, the company made SAR0.15 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of AXA Cooperative Insurance's Earnings Growth And 15% ROE

On the face of it, AXA Cooperative Insurance's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 9.3%, is definitely interesting. Even more so after seeing AXA Cooperative Insurance's exceptional 29% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. 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.

As a next step, we compared AXA Cooperative Insurance's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 0.3%.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is AXA Cooperative Insurance fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is AXA Cooperative Insurance Making Efficient Use Of Its Profits?

Conclusion

Overall, we are quite pleased with AXA 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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