Is Weakness In Abdullah Al-Othaim Markets Company (TADAWUL:4001) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

It is hard to get excited after looking at Abdullah Al-Othaim Markets' (TADAWUL:4001) recent performance, when its stock has declined 10% over the past month. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How Do You Calculate Return On Equity?

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 Abdullah Al-Othaim Markets is:

36% = ر.س483m ÷ ر.س1.3b (Based on the trailing twelve months to June 2025).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each SAR1 of shareholders' capital it has, the company made SAR0.36 in profit.

See our latest analysis for Abdullah Al-Othaim Markets

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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 36% ROE

Firstly, we acknowledge that Abdullah Al-Othaim Markets has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 17% which is quite remarkable. However, for some reason, the higher returns aren't reflected in Abdullah Al-Othaim Markets' meagre five year net income growth average of 4.8%. That's a bit unexpected from a company which has such a high rate of return. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or or poor allocation of capital.

As a next step, we compared Abdullah Al-Othaim Markets' 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 1.1%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Abdullah Al-Othaim Markets''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

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

With a high three-year median payout ratio of 72% (or a retention ratio of 28%), most of Abdullah Al-Othaim Markets' profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, Abdullah Al-Othaim Markets has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 96% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Conclusion

On the whole, we feel that Abdullah Al-Othaim Markets' performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.