Does Fesh Fash Snack Food Production Company's (TADAWUL:9515) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Fesh Fash Snack Food Production's (TADAWUL:9515) stock is up by a considerable 45% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. In this article, we decided to focus on Fesh Fash Snack Food Production's 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Fesh Fash Snack Food Production

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Fesh Fash Snack Food Production is:

22% = ر.س3.2m ÷ ر.س15m (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.22.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Fesh Fash Snack Food Production's Earnings Growth And 22% ROE

At first glance, Fesh Fash Snack Food Production's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 20%. Having said that, Fesh Fash Snack Food Production's five year net income decline rate was 21%. Bear in mind, the company does have a slightly low ROE. Therefore, the decline in earnings could also be the result of this.

So, as a next step, we compared Fesh Fash Snack Food Production's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 15% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Fesh Fash Snack Food Production fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Fesh Fash Snack Food Production Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 81% (implying that 19% of the profits are retained), most of Fesh Fash Snack Food Production's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 3 risks we have identified for Fesh Fash Snack Food Production visit our risks dashboard for free.

Moreover, Fesh Fash Snack Food Production has been paying dividends for three years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Conclusion

On the whole, Fesh Fash Snack Food Production's performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Up till now, we've only made a short study of the company's growth data. To gain further insights into Fesh Fash Snack Food Production's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.