With its stock down 13% over the past three months, it is easy to disregard Bupa Arabia for Cooperative Insurance (TADAWUL:8210). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Bupa Arabia for Cooperative Insurance's ROE today.

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 Is ROE Calculated?

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 Bupa Arabia for Cooperative Insurance is:

20% = ر.س1.1b ÷ ر.س5.2b (Based on the trailing twelve months to June 2025).

The 'return' is the income the business earned over the last year. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.20.

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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Bupa Arabia for Cooperative Insurance's Earnings Growth And 20% ROE

On the face of it, Bupa Arabia for Cooperative Insurance's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 7.1% which we definitely can't overlook. This probably goes some way in explaining Bupa Arabia for Cooperative Insurance's moderate 14% growth over the past five years amongst other factors. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence there might be some other aspects that are causing earnings to grow. 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.

Next, on comparing with the industry net income growth, we found that Bupa Arabia for Cooperative Insurance's reported growth was lower than the industry growth of 30% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Bupa Arabia for Cooperative Insurance fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Bupa Arabia for Cooperative Insurance Using Its Retained Earnings Effectively?

While Bupa Arabia for Cooperative Insurance has a three-year median payout ratio of 54% (which means it retains 46% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Moreover, Bupa Arabia for Cooperative Insurance is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 64%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 22%.

Conclusion

On the whole, we do feel that Bupa Arabia for Cooperative Insurance has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely achieved by the company reinvesting its earnings at a decent rate of return. Still, its earnings retention is quite low, so we wonder if the company's growth could be higher, were it to pay out less dividends and retain more of its profits? That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.