Are Abdullah Al-Othaim Markets Company's (TADAWUL:4001) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

With its stock down 4.0% over the past three months, it is easy to disregard Abdullah Al-Othaim Markets (TADAWUL:4001). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Abdullah Al-Othaim Markets' 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.

Check out our latest analysis for Abdullah Al-Othaim Markets

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 Abdullah Al-Othaim Markets is:

40% = ر.س493m ÷ ر.س1.2b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.40.

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. 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.

Abdullah Al-Othaim Markets' Earnings Growth And 40% ROE

First thing first, we like that Abdullah Al-Othaim Markets has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 23% also doesn't go unnoticed by us. Probably as a result of this, Abdullah Al-Othaim Markets was able to see a decent net income growth of 19% over the last five years.

We then compared Abdullah Al-Othaim Markets' 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 12% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is 4001 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Abdullah Al-Othaim Markets Efficiently Re-investing Its Profits?

Abdullah Al-Othaim Markets has a very high three-year median payout ratio of 106% suggesting that the company's shareholders are getting paid from more than just the company's earnings. In spite of this, the company was able to grow its earnings respectably, as we saw above. Although, the high payout ratio is certainly something we would keep an eye on if the company is not able to keep up its growth, or if business deteriorates. To know the 3 risks we have identified for Abdullah Al-Othaim Markets visit our risks dashboard for free.

Besides, Abdullah Al-Othaim Markets has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 86%. As a result, Abdullah Al-Othaim Markets' ROE is not expected to change by much either, which we inferred from the analyst estimate of 45% for future ROE.

Summary

Overall, we feel that Abdullah Al-Othaim Markets certainly does have some positive factors to consider. Specifically, its high ROE which likely led to the growth in earnings. Bear in mind, the company reinvests little to none of its profits, which means that investors aren't necessarily reaping the full benefits of the high rate of return. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.

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