It’s hard to get excited about the recent performance of Saudi Basic Industries (TADAWUL:2010). The company’s stock has fallen 2.3% over the past month. Stock prices are usually driven by the company’s fundamentals over the long term, and in this case they look pretty weak, so we decided to look at the company’s key financial metrics. Specifically, I chose to explore the ROE of Saudi basic industries in this article.
Return on equity or ROE is an important factor for shareholders to consider as it indicates how effectively capital is being reinvested. More simply, it measures a company’s profitability in relation to shareholders’ equity.
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How is ROE calculated?
Return on equity can be calculated using the following formula:
Return on Equity = Net Income (from Continuing Operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Saudi Basic Industries is:
7.3% = JPY 1.6 billion ÷ JPY 21.6 billion (based on 12 months to March 2023).
“Return” is the profit in the last 12 months. This means that the company generated a profit of his 0.07 SAR for each 1 SAR worth of shareholders’ equity.
What is the relationship between ROE and profit growth rate?
So far, we’ve learned that ROE is a measure of how efficiently a company generates profits. Here, the company must assess how much of its profits will be reinvested or “reserved” for future growth, which will give an idea of the company’s growth potential. All else being equal, companies with high return on equity and profit retention typically have higher growth rates compared to companies that do not have the same characteristics.
Saudi Basic Industries Revenue Growth and ROE 7.3%
It is clear that the ROE of Saudi basic industries is quite low. Even compared to the industry average ROE of 9.9%, the company’s ROE is pretty dismal. The flat earnings of Saudi basic industries over the past five years can therefore be explained, among other things, by low ROEs.
Next, when compared to the industry’s net profit growth, we find that the reported growth rate of the Saudi basic industry is lower than the industry’s growth rate of 27% over the same period. This is what we don’t want to see.
Earnings growth is a big factor in stock valuation. It is important for investors to know whether the market is pricing in growth (or decline) in a company’s expected earnings. That way, you’ll know if the stock is headed for crystal-clear blue waters, or if wetlands await. Are Saudi Basic Industries rated well compared to other companies?These three metrics may help him decide.
Are Saudi Basic Industries Harnessing Profits Efficiently?
Saudi Basic Industries’ high three-year median dividend payout ratio of 62% (meaning the company would retain only 38% of its earnings) meant that the company’s profit growth was slashed as a result of paying out the majority of its earnings. This suggests that there was little
Moreover, Saudi basic industries have been paying dividends for at least a decade, suggesting that management must have realized that shareholders wanted dividends over earnings growth. A study of the latest analyst consensus data found that the company’s future dividend payout ratio is expected to rise to 75% over the next three years. However, the future ROE of Saudi basic industries is expected to rise to 9.5%, despite the expected increase in dividend payout ratio. We speculate that there may be other factors driving the company’s projected ROE growth.
All in all, we should think twice before making investment decisions regarding Saudi basic industries. The company’s earnings growth is slowing as little, if any, earnings are retained and reinvested at very low rates of return. That said, the company’s earnings will continue to grow, according to the latest analyst forecasts. Are these analyst forecasts based on broader expectations for the industry, or are they based on company fundamentals? Click here to view the analyst forecasts page for the company .
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst projections, and articles are not intended as financial advice. This is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to provide long-term focused analysis based on underlying data. Please note that our analysis may not take into account the latest announcements or qualitative material from price-sensitive companies. Simply Wall St does not have any positions in any of the securities mentioned.