Amana Cooperative Insurance Company (TADAWUL:8310) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Amana Cooperative Insurance (TADAWUL:8310) has had a great run on the share market with its stock up by a significant 31% over the last three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Amana Cooperative Insurance's ROE.

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.

View our latest analysis for Amana Cooperative Insurance

How To 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 Amana Cooperative Insurance is:

2.6% = ر.س4.1m ÷ ر.س161m (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each SAR1 of shareholders' capital it has, the company made SAR0.03 in profit.

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. 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. 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.

A Side By Side comparison of Amana Cooperative Insurance's Earnings Growth And 2.6% ROE

As you can see, Amana Cooperative Insurance's ROE looks pretty weak. Even when compared to the industry average of 7.8%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 16% seen by Amana Cooperative Insurance was possibly a result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

However, when we compared Amana Cooperative Insurance's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 2.8% in the same period. This is quite worrisome.

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). 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 Amana Cooperative Insurance is trading on a high P/E or a low P/E, relative to its industry.

Is Amana Cooperative Insurance Making Efficient Use Of Its Profits?

Summary

Overall, we have mixed feelings about Amana Cooperative Insurance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 1 risk we have identified for Amana Cooperative Insurance by visiting our risks dashboard for free on our platform here.

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