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 3.9% over the past week. 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. Specifically, we decided to study Al-Dawaa Medical Services' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How Is ROE Calculated?

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.س380m ÷ ر.س1.5b (Based on the trailing twelve months to March 2025).

The 'return' is the income the business earned over the last year. That means that for every SAR1 worth of shareholders' equity, the company generated SAR0.25 in profit.

View our latest analysis for Al-Dawaa Medical Services

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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. Especially when compared to the industry average of 20% the company's ROE looks pretty impressive. This probably laid the ground for Al-Dawaa Medical Services' moderate 9.8% net income growth seen over the past five years.

We then compared Al-Dawaa Medical Services' 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 1.9% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for 4163? You can find out in our latest intrinsic value infographic research report.

Is Al-Dawaa Medical Services Using Its Retained Earnings Effectively?

While Al-Dawaa Medical Services has a three-year median payout ratio of 65% (which means it retains 35% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Moreover, Al-Dawaa Medical Services is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 67% of its profits over the next three years. As a result, Al-Dawaa Medical Services' ROE is not expected to change by much either, which we inferred from the analyst estimate of 26% for future ROE.

Summary

On the whole, we feel that Al-Dawaa Medical Services' performance has been quite good. 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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.