National Medical Care Company's (TADAWUL:4005) Stock Been Rising But Financials Look Weak: Should Shareholders Be Worried?

Most readers would already know that National Medical Care's (TADAWUL:4005) stock increased by 1.7% over the past week. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company's financials don't look very promising. In this article, we decided to focus on National Medical Care's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for National Medical Care

How Do You Calculate Return On Equity?

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 Medical Care is:

9.3% = ر.س95m ÷ ر.س1.0b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.09 in profit.

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. 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.

National Medical Care's Earnings Growth And 9.3% ROE

As you can see, National Medical Care's ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 8.5% either. Therefore, it might not be wrong to say that the five year net income decline of 8.3% seen by National Medical Care was possibly a result of the disappointing ROE.

From the 7.1% decline reported by the industry in the same period, we infer that National Medical Care and its industry are both shrinking at a similar rate.

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. What is 4005 worth today? The intrinsic value infographic in our free research report helps visualize whether 4005 is currently mispriced by the market.

Is National Medical Care Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 70% (implying that 30% of the profits are retained), most of National Medical Care'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.

In addition, National Medical Care has been paying dividends over a period of eight years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline. 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 79%. Regardless, the future ROE for National Medical Care is predicted to rise to 13% despite there being not much change expected in its payout ratio.

Conclusion

On the whole, National Medical Care'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. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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. 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.
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