Declining Stock and Solid Fundamentals: Is The Market Wrong About Al-Dawaa Medical Services Company (TADAWUL:4163)?

It is hard to get excited after looking at Al-Dawaa Medical Services' (TADAWUL:4163) recent performance, when its stock has declined 16% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Al-Dawaa Medical Services' 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.

See our latest analysis for Al-Dawaa Medical Services

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 Al-Dawaa Medical Services is:

25% = ر.س359m ÷ ر.س1.4b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.25 in profit.

Why Is ROE Important For 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 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 begin with, Al-Dawaa Medical Services seems to have a respectable ROE. Even when compared to the industry average of 22% the company's ROE looks quite decent. Consequently, this likely laid the ground for the decent growth of 9.0% seen over the past five years by Al-Dawaa Medical Services.

As a next step, we compared Al-Dawaa Medical Services' 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 6.5%.

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. 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 Making Efficient Use Of Its Profits?

Al-Dawaa Medical Services has a significant three-year median payout ratio of 70%, meaning that it is left with only 30% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

While Al-Dawaa Medical Services has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 62%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 27%.

Conclusion

In total, we are pretty happy with Al-Dawaa Medical Services' performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.