National Company for Learning and Education's (TADAWUL:4291) Dismal Stock Performance Reflects Weak Fundamentals

By
Simply Wall St
Published
March 17, 2022
SASE:4291
Source: Shutterstock

National Company for Learning and Education (TADAWUL:4291) has had a rough three months with its share price down 15%. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. In this article, we decided to focus on National Company for Learning and Education's ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for National Company for Learning and Education

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 National Company for Learning and Education is:

6.1% = ر.س39m ÷ ر.س631m (Based on the trailing twelve months to November 2021).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.06.

Why Is ROE Important For 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.

A Side By Side comparison of National Company for Learning and Education's Earnings Growth And 6.1% ROE

It is hard to argue that National Company for Learning and Education's ROE is much good in and of itself. Even compared to the average industry ROE of 9.7%, the company's ROE is quite dismal. For this reason, National Company for Learning and Education's five year net income decline of 12% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

However, when we compared National Company for Learning and Education's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 5.8% in the same period. This is quite worrisome.

past-earnings-growth
SASE:4291 Past Earnings Growth March 17th 2022

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. If you're wondering about National Company for Learning and Education's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is National Company for Learning and Education Using Its Retained Earnings Effectively?

National Company for Learning and Education has a high three-year median payout ratio of 68% (that is, it is retaining 32% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only very little left to reinvest into the business, growth in earnings is far from likely.

Additionally, National Company for Learning and Education has paid dividends over a period of three years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 64% of its profits over the next three years. Still, forecasts suggest that National Company for Learning and Education's future ROE will rise to 11% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we would be extremely cautious before making any decision on National Company for Learning and Education. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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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