Dar Al Takaful PJSC (DFM:DARTAKAFUL) has had a great run on the share market with its stock up by a significant 25% over the last three months. Given that stock prices are usually aligned with a company’s financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Dar Al Takaful PJSC’s ROE in this article.
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
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 Dar Al Takaful PJSC is:
12% = د.إ18m ÷ د.إ146m (Based on the trailing twelve months to September 2021).
The ‘return’ is the income the business earned over the last year. One way to conceptualize this is that for each AED1 of shareholders’ capital it has, the company made AED0.12 in profit.
Why Is ROE Important For 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. 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.
Dar Al Takaful PJSC’s Earnings Growth And 12% ROE
When you first look at it, Dar Al Takaful PJSC’s ROE doesn’t look that attractive. Although a closer study shows that the company’s ROE is higher than the industry average of 8.3% which we definitely can’t overlook. Especially when you consider Dar Al Takaful PJSC’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. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.
As a next step, we compared Dar Al Takaful PJSC’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 14%.
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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Dar Al Takaful PJSC’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Dar Al Takaful PJSC Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 68% (implying that it keeps only 32% of profits) for Dar Al Takaful PJSC suggests that the company’s growth wasn’t really hampered despite it returning most of the earnings to its shareholders.
While Dar Al Takaful PJSC has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.
In total, it does look like Dar Al Takaful PJSC has some positive aspects to its business. Namely, its significant earnings growth, to which its moderate rate of return likely contributed. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that’s probably a good sign. Up till now, we’ve only made a short study of the company’s growth data.