Should We Be Delighted With Rabigh Refining and Petrochemical Company's (TADAWUL:2380) ROE Of 25%?

By
Simply Wall St
Published
March 16, 2022
SASE:2380
Source: Shutterstock

Many investors are still learning about the various metrics that can be useful when analysing a stock. This article is for those who would like to learn about Return On Equity (ROE). By way of learning-by-doing, we'll look at ROE to gain a better understanding of Rabigh Refining and Petrochemical Company (TADAWUL:2380).

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Rabigh Refining and Petrochemical

How To 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 Rabigh Refining and Petrochemical is:

25% = ر.س2.0b ÷ ر.س8.3b (Based on the trailing twelve months to December 2021).

The 'return' is the profit over the last twelve months. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.25.

Does Rabigh Refining and Petrochemical Have A Good Return On Equity?

Arguably the easiest way to assess company's ROE is to compare it with the average in its industry. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. As you can see in the graphic below, Rabigh Refining and Petrochemical has a higher ROE than the average (13%) in the Oil and Gas industry.

roe
SASE:2380 Return on Equity March 16th 2022

That's clearly a positive. However, bear in mind that a high ROE doesn’t necessarily indicate efficient profit generation. A higher proportion of debt in a company's capital structure may also result in a high ROE, where the high debt levels could be a huge risk .

The Importance Of Debt To Return On Equity

Companies usually need to invest money to grow their profits. That cash can come from issuing shares, retained earnings, or debt. In the first and second cases, the ROE will reflect this use of cash for investment in the business. In the latter case, the debt used for growth will improve returns, but won't affect the total equity. That will make the ROE look better than if no debt was used.

Combining Rabigh Refining and Petrochemical's Debt And Its 25% Return On Equity

It appears that Rabigh Refining and Petrochemical makes extensive use of debt to improve its returns, because it has an alarmingly high debt to equity ratio of 4.66. Its ROE is decent, but once I consider all the debt, I'm not really impressed.

Summary

Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. A company that can achieve a high return on equity without debt could be considered a high quality business. All else being equal, a higher ROE is better.

But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. So you might want to check this FREE visualization of analyst forecasts for the company.

But note: Rabigh Refining and Petrochemical may not be the best stock to buy. So take a peek at this free list of interesting companies with high ROE and low debt.

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