Is The National Shipping Company of Saudi Arabia's (TADAWUL:4030) Stock On A Downtrend As A Result Of Its Poor Financials?

By
Simply Wall St
Published
January 15, 2022

National Shipping Company of Saudi Arabia (TADAWUL:4030) has had a rough three months with its share price down 11%. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. In this article, we decided to focus on National Shipping Company of Saudi Arabia'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for National Shipping Company of Saudi Arabia

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 National Shipping Company of Saudi Arabia is:

2.1% = ر.س209m ÷ ر.س9.8b (Based on the trailing twelve months to September 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.02 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of National Shipping Company of Saudi Arabia's Earnings Growth And 2.1% ROE

As you can see, National Shipping Company of Saudi Arabia's ROE looks pretty weak. Even when compared to the industry average of 13%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 10% seen by National Shipping Company of Saudi Arabia was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

However, when we compared National Shipping Company of Saudi Arabia's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 2.9% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is National Shipping Company of Saudi Arabia fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is National Shipping Company of Saudi Arabia Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 99% (implying that 1.0% of the profits are retained), most of National Shipping Company of Saudi Arabia's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. To know the 4 risks we have identified for National Shipping Company of Saudi Arabia visit our risks dashboard for free.

Moreover, National Shipping Company of Saudi Arabia has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

In total, we would have a hard think before deciding on any investment action concerning National Shipping Company of Saudi Arabia. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of National Shipping Company of Saudi Arabia's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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