Declining Stock and Decent Financials: Is The Market Wrong About Abdullah Al-Othaim Markets Company (TADAWUL:4001)?

It is hard to get excited after looking at Abdullah Al-Othaim Markets' (TADAWUL:4001) recent performance, when its stock has declined 7.5% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Abdullah Al-Othaim Markets' 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.

Check out our latest analysis for Abdullah Al-Othaim Markets

How Is ROE Calculated?

The formula for ROE 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:

38% = ر.س411m ÷ ر.س1.1b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each SAR1 of shareholders' capital it has, the company made SAR0.38 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of Abdullah Al-Othaim Markets' Earnings Growth And 38% ROE

First thing first, we like that Abdullah Al-Othaim Markets has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 22% which is quite remarkable. Probably as a result of this, Abdullah Al-Othaim Markets was able to see a decent net income growth of 12% over the last five years.

Next, on comparing with the industry net income growth, we found that Abdullah Al-Othaim Markets' growth is quite high when compared to the industry average growth of 6.5% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 4001 worth today? The intrinsic value infographic in our free research report helps visualize whether 4001 is currently mispriced by the market.

Is Abdullah Al-Othaim Markets Making Efficient Use Of Its Profits?

Abdullah Al-Othaim Markets has a very high three-year median payout ratio of 104% 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. That being said, the high payout ratio could be worth keeping an eye on in case the company is unable to keep up its current growth momentum.

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 104%. Regardless, the future ROE for Abdullah Al-Othaim Markets is predicted to rise to 51% despite there being not much change expected in its payout ratio.

Summary

On the whole, we do feel that Abdullah Al-Othaim Markets has some positive attributes. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.