The National Shipping Company of Saudi Arabia's (TADAWUL:4030) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

National Shipping Company of Saudi Arabia's (TADAWUL:4030) stock is up by a considerable 11% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study National Shipping Company of Saudi Arabia's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for National Shipping Company of Saudi Arabia

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 National Shipping Company of Saudi Arabia is:

15% = ر.س2.0b ÷ ر.س13b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.15.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

National Shipping Company of Saudi Arabia's Earnings Growth And 15% ROE

As you can see, National Shipping Company of Saudi Arabia's ROE looks pretty weak. Still, the company's ROE is higher than the average industry ROE of 12% so that's certainly interesting. Particularly, the modest 17% net income growth seen by National Shipping Company of Saudi Arabia over the past five years is a positive. That being said, the company does have a low ROE to begin with, just that its higher than the industry average. So there might well be other reasons for the earnings to grow. For instance, the company has a low payout ratio or is being managed efficiently

Next, on comparing National Shipping Company of Saudi Arabia's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 21% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about National Shipping Company of Saudi Arabia's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is National Shipping Company of Saudi Arabia Using Its Retained Earnings Effectively?

National Shipping Company of Saudi Arabia's three-year median payout ratio to shareholders is 24% (implying that it retains 76% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, National Shipping Company of Saudi Arabia has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with National Shipping Company of Saudi Arabia's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard will have the 1 risk we have identified for National Shipping Company of Saudi Arabia.

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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.