Al-Omran Industrial Trading Co.'s (TADAWUL:4141) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Al-Omran Industrial Trading's (TADAWUL:4141) stock up by 8.2% over the past three months. However, the company's financials look a bit inconsistent and market outcomes are ultimately driven by long-term fundamentals, meaning that the stock could head in either direction. In this article, we decided to focus on Al-Omran Industrial Trading's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Al-Omran Industrial Trading

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Al-Omran Industrial Trading is:

2.2% = ر.س2.5m ÷ ر.س111m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.02.

What Has ROE Got To Do With 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.

Al-Omran Industrial Trading's Earnings Growth And 2.2% ROE

It is hard to argue that Al-Omran Industrial Trading's ROE is much good in and of itself. Even when compared to the industry average of 7.7%, the ROE figure is pretty disappointing. For this reason, Al-Omran Industrial Trading's five year net income decline of 51% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

So, as a next step, we compared Al-Omran Industrial Trading's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 4.4% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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-Omran Industrial Trading is trading on a high P/E or a low P/E, relative to its industry.

Is Al-Omran Industrial Trading Making Efficient Use Of Its Profits?

Summary

Overall, we have mixed feelings about Al-Omran Industrial Trading. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 3 risks we have identified for Al-Omran Industrial Trading visit our risks dashboard for free.

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This article by Simply Wall St is general in nature. 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.
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