Are Robust Financials Driving The Recent Rally In Saudi Steel Pipes Company's (TADAWUL:1320) Stock?

Saudi Steel Pipes' (TADAWUL:1320) stock is up by a considerable 98% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Saudi Steel Pipes' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Saudi Steel Pipes

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Saudi Steel Pipes is:

24% = ر.س217m ÷ ر.س894m (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.24.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Saudi Steel Pipes' Earnings Growth And 24% ROE

At first glance, Saudi Steel Pipes seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 5.5%. Probably as a result of this, Saudi Steel Pipes was able to see an impressive net income growth of 80% over the last five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared Saudi Steel Pipes' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 25% in the same 5-year period.

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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Saudi Steel Pipes''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Saudi Steel Pipes Efficiently Re-investing Its Profits?

Saudi Steel Pipes doesn't pay any regular dividends to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Summary

In total, we are pretty happy with Saudi Steel Pipes' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 1 risk we have identified for Saudi Steel Pipes by visiting our risks dashboard for free on our platform here.

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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.