Are Strong Financial Prospects The Force That Is Driving The Momentum In Al-Babtain Power and Telecommunications Company's TADAWUL:2320) Stock?

Al-Babtain Power and Telecommunications' (TADAWUL:2320) stock is up by a considerable 11% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Al-Babtain Power and Telecommunications' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How To 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 Al-Babtain Power and Telecommunications is:

27% = ر.س322m ÷ ر.س1.2b (Based on the trailing twelve months to June 2025).

The 'return' is the yearly profit. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.27.

View our latest analysis for Al-Babtain Power and Telecommunications

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Al-Babtain Power and Telecommunications' Earnings Growth And 27% ROE

To start with, Al-Babtain Power and Telecommunications' ROE looks acceptable. Especially when compared to the industry average of 9.0% the company's ROE looks pretty impressive. Probably as a result of this, Al-Babtain Power and Telecommunications was able to see an impressive net income growth of 37% over the last five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

We then compared Al-Babtain Power and Telecommunications' 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 14% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Al-Babtain Power and Telecommunications is trading on a high P/E or a low P/E, relative to its industry.

Is Al-Babtain Power and Telecommunications Making Efficient Use Of Its Profits?

Al-Babtain Power and Telecommunications has a three-year median payout ratio of 40% (where it is retaining 60% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Al-Babtain Power and Telecommunications is reinvesting its earnings efficiently.

Additionally, Al-Babtain Power and Telecommunications has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 33% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 26%.

Conclusion

Overall, we are quite pleased with Al-Babtain Power and Telecommunications' 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.

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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.