Thob Al Aseel Co. (TADAWUL:4012) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Thob Al Aseel (TADAWUL:4012) has had a great run on the share market with its stock up by a significant 44% over the last month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Thob Al Aseel'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Thob Al Aseel

How Is ROE Calculated?

ROE 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 Thob Al Aseel is:

16% = ر.س86m ÷ ر.س537m (Based on the trailing twelve months to September 2020).

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 SAR0.16.

What Has ROE Got To Do With 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. 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.

Thob Al Aseel's Earnings Growth And 16% ROE

On the face of it, Thob Al Aseel's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 6.1% doesn't go unnoticed by us. However, Thob Al Aseel's five year net income decline rate was 5.0%. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. So that could be one of the factors that are causing earnings growth to shrink.

So, as a next step, we compared Thob Al Aseel'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 6.3% 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Thob Al Aseel is trading on a high P/E or a low P/E, relative to its industry.

Is Thob Al Aseel Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 83% (implying that 17% of the profits are retained), most of Thob Al Aseel's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. You can see the 4 risks we have identified for Thob Al Aseel by visiting our risks dashboard for free on our platform here.

Moreover, Thob Al Aseel has been paying dividends for three years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Summary

In total, we're a bit ambivalent about Thob Al Aseel's performance. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. Up till now, we've only made a short study of the company's growth data. To gain further insights into Thob Al Aseel's past profit growth, check out this visualization of past earnings, revenue and cash flows.

If you’re looking to trade Thob Al Aseel, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.