Should Weakness in Gulf Insurance Group's (TADAWUL:8250) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 9.6% over the past week, it is easy to disregard Gulf Insurance Group (TADAWUL:8250). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Gulf Insurance Group's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Gulf Insurance Group

How Do You 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 Gulf Insurance Group is:

3.8% = ر.س38m ÷ ر.س1.0b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each SAR1 of shareholders' capital it has, the company made SAR0.04 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. 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 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.

Gulf Insurance Group's Earnings Growth And 3.8% ROE

It is quite clear that Gulf Insurance Group's ROE is rather low. Not just that, even compared to the industry average of 11%, the company's ROE is entirely unremarkable. Thus, the low net income growth of 3.6% seen by Gulf Insurance Group over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared Gulf Insurance Group's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 4.2% 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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Gulf Insurance Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Gulf Insurance Group Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 31% (implying that the company retains the remaining 69% of its income), Gulf Insurance Group's earnings growth was quite low. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Gulf Insurance Group only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Summary

Overall, we feel that Gulf Insurance Group certainly does have some positive factors to consider. That is, a decent growth in earnings backed by a high rate of reinvestment. However, we do feel that that earnings growth could have been higher if the business were to improve on the low ROE rate. Especially given how the company is reinvesting a huge chunk of its profits. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.