Should Weakness in National Company for Learning and Education's (TADAWUL:4291) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 6.6% over the past week, it is easy to disregard National Company for Learning and Education (TADAWUL:4291). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on National Company for Learning and Education's ROE.

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 Do You Calculate Return On Equity?

The formula for ROE 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:

22% = ر.س172m ÷ ر.س793m (Based on the trailing twelve months to July 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 SAR0.22 in profit.

See our latest analysis for National Company for Learning and Education

Why Is ROE Important For 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.

A Side By Side comparison of National Company for Learning and Education's Earnings Growth And 22% ROE

On the face of it, National Company for Learning and Education's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 22%, we may spare it some thought. Looking at National Company for Learning and Education's exceptional 26% five-year net income growth in particular, we are definitely impressed. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared National Company for Learning and Education's 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 15%.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is National Company for Learning and Education fairly valued compared to other companies? These 3 valuation measures might help you decide.

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

National Company for Learning and Education has a significant three-year median payout ratio of 65%, meaning the company only retains 35% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Moreover, National Company for Learning and Education is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying 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 65%. Still, forecasts suggest that National Company for Learning and Education's future ROE will drop to 13% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, it does look like National Company for Learning and Education has some positive aspects to its business. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.