Nahdi Medical Company's (TADAWUL:4164) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Nahdi Medical (TADAWUL:4164) has had a rough three months with its share price down 6.6%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Nahdi Medical's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Nahdi Medical

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 Nahdi Medical is:

35% = ر.س833m ÷ ر.س2.4b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.35.

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. 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.

Nahdi Medical's Earnings Growth And 35% ROE

At first glance, Nahdi Medical seems to have a decent ROE. Especially when compared to the industry average of 22% the company's ROE looks pretty impressive. Despite this, Nahdi Medical's five year net income growth was quite low averaging at only 4.0%. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn't been able to do so. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.

As a next step, we compared Nahdi Medical's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 6.5% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Nahdi Medical's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Nahdi Medical Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 80% (or a retention ratio of 20%), most of Nahdi Medical's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, Nahdi Medical only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 81% of its profits over the next three years. As a result, Nahdi Medical's ROE is not expected to change by much either, which we inferred from the analyst estimate of 32% for future ROE.

Summary

In total, it does look like Nahdi Medical has some positive aspects to its business. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.