The National Shipping Company of Saudi Arabia's (TADAWUL:4030) Dismal Stock Performance Reflects Weak Fundamentals

By
Simply Wall St
Published
May 31, 2021
SASE:4030

With its stock down 2.2% over the past three months, it is easy to disregard National Shipping Company of Saudi Arabia (TADAWUL:4030). 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 Shipping Company of Saudi Arabia'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for National Shipping Company of Saudi Arabia

How Is ROE Calculated?

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:

12% = ر.س1.2b ÷ ر.س11b (Based on the trailing twelve months to March 2021).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each SAR1 of shareholders' capital it has, the company made SAR0.12 in profit.

Why Is ROE Important For 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 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.

National Shipping Company of Saudi Arabia's Earnings Growth And 12% ROE

When you first look at it, National Shipping Company of Saudi Arabia's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 9.0%, is definitely interesting. But seeing National Shipping Company of Saudi Arabia's five year net income decline of 12% over the past five years, we might rethink that. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the shrinking earnings.

That being said, we compared National Shipping Company of Saudi Arabia's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 13% in the same period.

past-earnings-growth
SASE:4030 Past Earnings Growth June 1st 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if National Shipping Company of Saudi Arabia is trading on a high P/E or a low P/E, relative to its industry.

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

National Shipping Company of Saudi Arabia has a high three-year median payout ratio of 99% (that is, it is retaining 1.0% 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. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. You can see the 3 risks we have identified for National Shipping Company of Saudi Arabia by visiting our risks dashboard for free on our platform here.

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.

Conclusion

Overall, we would be extremely cautious before making any decision on National Shipping Company of Saudi Arabia. The company has shown a disappointing growth in its earnings as a result of it retaining little to almost none of its profits. So, the decent ROE it does have, is not much useful to investors given that the company is reinvesting very little into its business. So far, we've only made a quick discussion around the company's earnings growth. 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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This article by Simply Wall St is general in nature. 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.
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