Has Saudia Dairy & Foodstuff Company (TADAWUL:2270) Stock's Recent Performance Got Anything to Do With Its Financial Health?

Saudia Dairy & Foodstuff's (TADAWUL:2270) stock is up by 9.9% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Particularly, we will be paying attention to Saudia Dairy & Foodstuff's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Saudia Dairy & Foodstuff

How Do You 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 Saudia Dairy & Foodstuff is:

28% = ر.س490m ÷ ر.س1.8b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.28 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Saudia Dairy & Foodstuff's Earnings Growth And 28% ROE

To begin with, Saudia Dairy & Foodstuff seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 15%. This certainly adds some context to Saudia Dairy & Foodstuff's decent 14% net income growth seen over the past five years.

We then compared Saudia Dairy & Foodstuff's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 18% in the same 5-year period, which is a bit concerning.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Saudia Dairy & Foodstuff fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Saudia Dairy & Foodstuff Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 86% (or a retention ratio of 14%) for Saudia Dairy & Foodstuff suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Saudia Dairy & Foodstuff 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 84%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 29%.

Summary

In total, it does look like Saudia Dairy & Foodstuff has some positive aspects to its business. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.