Are Al-Dawaa Medical Services Company's (TADAWUL:4163) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

Al-Dawaa Medical Services (TADAWUL:4163) has had a rough three months with its share price down 17%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Al-Dawaa Medical Services' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Al-Dawaa Medical Services

How Do You 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 Al-Dawaa Medical Services is:

25% = ر.س329m ÷ ر.س1.3b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.25 in profit.

What Is The Relationship Between ROE And 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Al-Dawaa Medical Services' Earnings Growth And 25% ROE

To start with, Al-Dawaa Medical Services' ROE looks acceptable. Further, the company's ROE is similar to the industry average of 22%. This probably goes some way in explaining Al-Dawaa Medical Services' moderate 7.0% growth over the past five years amongst other factors.

As a next step, we compared Al-Dawaa Medical Services' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 16% in the same period.

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. Doing so will help them establish if the stock's future looks promising or ominous. What is 4163 worth today? The intrinsic value infographic in our free research report helps visualize whether 4163 is currently mispriced by the market.

Is Al-Dawaa Medical Services Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 72% (or a retention ratio of 28%) for Al-Dawaa Medical Services suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

While Al-Dawaa Medical Services has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 68% of its profits over the next three years. Regardless, the future ROE for Al-Dawaa Medical Services is predicted to rise to 31% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we feel that Al-Dawaa Medical Services certainly does have some positive factors to consider. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.