Raoom trading Company's (TADAWUL:9529) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Raoom trading's (TADAWUL:9529) stock increased significantly by 16% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Raoom trading's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Raoom trading

How To Calculate Return On Equity?

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 Raoom trading is:

30% = ر.س47m ÷ ر.س155m (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. That means that for every SAR1 worth of shareholders' equity, the company generated SAR0.30 in profit.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Raoom trading's Earnings Growth And 30% ROE

To start with, Raoom trading's ROE looks acceptable. On comparing with the average industry ROE of 14% the company's ROE looks pretty remarkable. Probably as a result of this, Raoom trading was able to see an impressive net income growth of 22% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Raoom trading's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 13%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Raoom trading fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Raoom trading Using Its Retained Earnings Effectively?

Raoom trading's three-year median payout ratio is a pretty moderate 34%, meaning the company retains 66% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Raoom trading is reinvesting its earnings efficiently.

Besides, Raoom trading has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we feel that Raoom trading's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 1 risk we have identified for Raoom trading 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.