Aldrees Petroleum and Transport Services Company's (TADAWUL:4200) Stock Is Going Strong: Is the Market Following Fundamentals?

Aldrees Petroleum and Transport Services (TADAWUL:4200) has had a great run on the share market with its stock up by a significant 28% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Aldrees Petroleum and Transport Services' ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Aldrees Petroleum and Transport Services

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Aldrees Petroleum and Transport Services is:

22% = ر.س242m ÷ ر.س1.1b (Based on the trailing twelve months to December 2022).

The 'return' is the yearly profit. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.22 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Aldrees Petroleum and Transport Services' Earnings Growth And 22% ROE

To begin with, Aldrees Petroleum and Transport Services seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 10%. This probably laid the ground for Aldrees Petroleum and Transport Services' significant 21% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then compared Aldrees Petroleum and Transport Services' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 11% in the same period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 4200 worth today? The intrinsic value infographic in our free research report helps visualize whether 4200 is currently mispriced by the market.

Is Aldrees Petroleum and Transport Services Efficiently Re-investing Its Profits?

Aldrees Petroleum and Transport Services' three-year median payout ratio is a pretty moderate 46%, meaning the company retains 54% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Aldrees Petroleum and Transport Services is reinvesting its earnings efficiently.

Moreover, Aldrees Petroleum and Transport Services is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 57% over the next three years. Still, forecasts suggest that Aldrees Petroleum and Transport Services' future ROE will rise to 28% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Conclusion

In total, we are pretty happy with Aldrees Petroleum and Transport Services' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.