Should Weakness in Nahdi Medical Company's (TADAWUL:4164) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 2.5% over the past three months, it is easy to disregard Nahdi Medical (TADAWUL:4164). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Nahdi Medical's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Nahdi Medical

How Do You Calculate Return On Equity?

Return on equity 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 Nahdi Medical is:

38% = ر.س881m ÷ ر.س2.3b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. That means that for every SAR1 worth of shareholders' equity, the company generated SAR0.38 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 38% ROE

First thing first, we like that Nahdi Medical has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 23% also doesn't go unnoticed by us. Probably as a result of this, Nahdi Medical was able to see a decent net income growth of 5.4% over the last five years.

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 12% 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. This then helps them determine if the stock is placed for a bright or bleak future. What is 4164 worth today? The intrinsic value infographic in our free research report helps visualize whether 4164 is currently mispriced by the market.

Is Nahdi Medical Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 79% (or a retention ratio of 21%) for Nahdi Medical suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

While Nahdi Medical 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 87% of its profits over the next three years. Accordingly, forecasts suggest that Nahdi Medical's future ROE will be 37% which is again, similar to the current ROE.

Conclusion

On the whole, we do feel that Nahdi Medical has some positive attributes. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com