Are Saudi Chemical Holding Company's (TADAWUL:2230) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

With its stock down 17% over the past three months, it is easy to disregard Saudi Chemical Holding (TADAWUL:2230). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Saudi Chemical Holding's ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Saudi Chemical Holding

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Saudi Chemical Holding is:

16% = ر.س329m ÷ ر.س2.0b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.16 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

Saudi Chemical Holding's Earnings Growth And 16% ROE

As you can see, Saudi Chemical Holding's ROE looks pretty weak. Further, we noted that the company's ROE is similar to the industry average of 16%. Looking at Saudi Chemical Holding's exceptional 39% five-year net income growth in particular, we are definitely impressed. Given the low ROE, it is likely that there could be some other reasons behind this growth as well. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Saudi Chemical Holding's 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 20% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. 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 Saudi Chemical Holding's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Saudi Chemical Holding Using Its Retained Earnings Effectively?

Saudi Chemical Holding has a significant three-year median payout ratio of 53%, meaning the company only retains 47% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Moreover, Saudi Chemical Holding 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.

Conclusion

In total, it does look like Saudi Chemical Holding has some positive aspects to its business. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Saudi Chemical Holding'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.