The Cooperative Insurance Company (TADAWUL: 8010) stock is down but fundamentals look decent: will the market correct the stock price in the future?
It’s hard to rejoice, when looking at Company for Cooperative Insurance’s latest performance (TADAWUL: 8010), when its stock is down 19% in the past three months. However, if you look carefully you may find that key financial indicators look pretty neat, which could mean the stock could go up over the long term, as markets typically reward more resilient long-term fundamentals. Today we will pay particular attention to the ROE of the Society for Cooperative Insurance.
ROE, or return on equity, is a useful tool for assessing how effectively a company can generate returns on the investments received from its shareholders. In simpler terms, it measures a company’s profitability in relation to its equity.
Check out our latest analysis for Cooperative Insurance Companies
How is the ROE calculated?
The return on equity can be calculated using the following formula:
Return on Equity = Net Income (from continuing operations) ÷ Equity
Based on the formula above, the corporate ROE for cooperative insurance is:
10% = ر, س 311 m ÷ ر, س 3.0 b (based on the last twelve months up to September 2021).
The “return” is the profit made over the past twelve months. Another way to imagine this is that for every SAR 1 of SAR 0.10 worth of equity, the company was able to make a profit.
What is the Relationship Between ROE and Earnings Growth?
We have already established that ROE is an efficient profitable measure of a company’s future earnings. We now need to assess how much profit the company can reinvest or “keep” for future growth, which then gives us an idea of the company’s growth potential. Assuming all else is equal, companies that have both higher return on equity and higher earnings retention typically have a higher growth rate than companies that do not share the same characteristics.
A side-by-side comparison of the company for Cooperative Insurance Profit Growth and 10% ROE
As you can see, the Company for Cooperative Insurance’s ROE looks pretty weak. Still, the company’s ROE is higher than the industry’s average ROE of 6.1%, which is certainly interesting. On the other hand, the fact that the company’s five-year net income has declined 5.4% over the past five years makes us think again. Keep in mind that the company’s ROE is quite low to begin with, only that it is above the industry average. So this explains the falling revenue.
With industry earnings down 5.4% over the same period, we expect both the company and the industry to shrink by the same amount.
SASE: 8010 Past earnings growth December 17, 2021
Earnings growth is an important metric to consider when evaluating a stock. The investor should seek to determine whether expected growth or decline in earnings, whichever is the case, is factored in. This then helps him determine whether the stock is placed for a bright or bleak future. Is the cooperative insurance company rated fairly compared to other companies? These 3 benchmarks can help you make a decision.
Does the cooperative insurance company use its retained earnings effectively?
Despite a normal 3-year median payout rate of 28% (i.e. a deductible rate of 72%), the fact that the revenues of the cooperative insurance have declined is pretty puzzling. So other factors could play a role here that could potentially hinder growth. The business, for example, has faced some headwinds.
Additionally, the cooperative insurance company has been paying dividends for at least a decade or more, suggesting management must have recognized that shareholders prefer dividends over earnings growth. If we look at the latest analyst consensus data, we can see that the company’s future payout ratio is projected to climb to 40% over the next three years. However, it is projected that Company for Cooperative Insurance’s future ROE will rise to 16%, although the company’s payout ratio is expected to increase. We suspect there might be a few other features of the business that could drive the anticipated growth in the company’s ROE.
Overall, we believe that the cooperative insurance company has some positive qualities. However, while the company has a decent ROE and high retained earnings, its earnings growth number is pretty disappointing. This suggests that there might be an external threat to the business holding back growth. With that in mind, we’ve examined the latest analyst predictions and found that while the company has shrunk its earnings in the past, analysts expect its earnings to rise in the future. To learn more about the latest analyst forecast for the company, check out this analyst forecast visualization for the company.
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This article from Simply Wall St is of a general nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in any of the stocks mentioned.