Is Saudi Arabian Oil Company's (TADAWUL:2222) Recent Stock Performance Influenced By Its Financials In Any Way?

Most readers would already know that Saudi Arabian Oil's (TADAWUL:2222) stock increased by 7.3% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Saudi Arabian Oil'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Is ROE Calculated?

ROE 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 Saudi Arabian Oil is:

22% = ر.س370b ÷ ر.س1.7t (Based on the trailing twelve months to June 2025).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each SAR1 of shareholders' capital it has, the company made SAR0.22 in profit.

Check out our latest analysis for Saudi Arabian Oil

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Saudi Arabian Oil's Earnings Growth And 22% ROE

On the face of it, Saudi Arabian Oil's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 9.6% which we definitely can't overlook. Consequently, this likely laid the ground for the decent growth of 10.0% seen over the past five years by Saudi Arabian Oil. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

We then performed a comparison between Saudi Arabian Oil's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 12% in the same 5-year 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. Doing so will help them establish if the stock's future looks promising or ominous. Is 2222 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Saudi Arabian Oil Making Efficient Use Of Its Profits?

Saudi Arabian Oil has a significant three-year median payout ratio of 91%, meaning that it is left with only 9.4% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, Saudi Arabian Oil has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 88%. As a result, Saudi Arabian Oil's ROE is not expected to change by much either, which we inferred from the analyst estimate of 24% for future ROE.

Conclusion

In total, it does look like Saudi Arabian Oil has some positive aspects to its business. Namely, its high earnings growth, which was probably achieved due to its respectable ROE. However, the considerably low reinvestment rate does diminish our excitement to a certain extent. 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. 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.