Stock Analysis

Can Mixed Fundamentals Have A Negative Impact on International General Insurance Holdings Ltd. (NASDAQ:IGIC) Current Share Price Momentum?

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NasdaqCM:IGIC
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International General Insurance Holdings' (NASDAQ:IGIC) stock is up by a considerable 11% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to International General Insurance Holdings' ROE today.

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.

See our latest analysis for International General Insurance Holdings

How To Calculate Return On Equity?

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 International General Insurance Holdings is:

6.6% = US$25m ÷ US$380m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.07 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 International General Insurance Holdings' Earnings Growth And 6.6% ROE

When you first look at it, International General Insurance Holdings' ROE doesn't look that attractive. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 8.3%. For this reason, International General Insurance Holdings' five year net income decline of 8.2% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. For example, it is possible that the business has allocated capital poorly or that the company has a very high payout ratio.

That being said, we compared International General Insurance Holdings' performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 6.8% in the same period.

past-earnings-growth
NasdaqCM:IGIC Past Earnings Growth December 6th 2020

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 International General Insurance Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is International General Insurance Holdings Efficiently Re-investing Its Profits?

Looking at its three-year median payout ratio of 46% (or a retention ratio of 54%) which is pretty normal, International General Insurance Holdings' declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Conclusion

Overall, we have mixed feelings about International General Insurance Holdings. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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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What are the risks and opportunities for International General Insurance Holdings?

International General Insurance Holdings Ltd.

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Rewards

  • Price-To-Earnings ratio (6.5x) is below the US market (15x)

  • Revenue is forecast to grow 17.51% per year

  • Earnings grew by 82% over the past year

Risks

  • Earnings are forecast to decline by an average of 2% per year for the next 3 years

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