Should the weakness in shares of United Fidelity Insurance Company (PSC) (ADX: FIDELITYUNITED) be taken as a sign that the market will correct the share price given decent financial data?


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With its shares down 19% over the past week, it’s easy to overlook United Fidelity Insurance Company (PSC) (ADX: FIDELITYUNITED). However, the fundamentals of the company look pretty decent, and long-term financial data is generally aligned with future movements in market prices. In this article, we have decided to focus on the ROE of United Fidelity Insurance Company (PSC).

ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. Simply put, it is used to assess a company’s profitability against its equity.

Check out our latest review for United Fidelity Insurance Company (PSC)

How do you calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE of United Fidelity Insurance Company (PSC) is:

7.5% = د.إ 7.0 m ÷ د.إ 93 m (Based on the last twelve months up to September 2021).

The “return” is the income the business has earned over the past year. This therefore means that for each AED1 of the investments of its shareholder, the company generates a profit of AED0.08.

Why is ROE important for profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.

United Fidelity Insurance Company (PSC) 7.5% profit growth and ROE

As you can see, the ROE of United Fidelity Insurance Company (PSC) seems quite low. A comparison with the industry shows that the company’s ROE is quite similar to the industry average ROE of 7.9%. Additionally, we are very pleased to see that United Fidelity Insurance Company (PSC) net income has grown significantly at a rate of 56% over the past five years. Given the low ROE, it is likely that there could be other reasons for this growth as well. Such as – high profit retention or effective management in place.

Then, comparing with the growth in net income of the industry, we found that the growth of United Fidelity Insurance Company (PSC) is quite high compared to the industry average growth of 12% during the same period, which is great to see.

ADX: FIDELITYUNITED Past profit growth on December 20, 2021

Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. Is United Fidelity Insurance Company (PSC) fair compared to other companies? These 3 evaluation measures could help you decide.

Is United Fidelity Insurance Company (PSC) Efficiently Using Retained Earnings?

United Fidelity Insurance Company (PSC) does not pay any dividends to its shareholders, which means the company has reinvested all of its profits back into the business. This is probably what explains the high number of profit growth discussed above.

Summary

All in all, it appears that United Fidelity Insurance Company (PSC) has positive aspects for its business. Even despite the low rate of return, the company has shown impressive profit growth by reinvesting heavily in its operations. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. Our risk dashboard would contain the 2 risks we identified for United Fidelity Insurance Company (PSC).

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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About Meredith Campagna

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