Al Hammadi Company For Development and Investment (TADAWUL:4007) has had a great run on the share market with its stock up by a significant 5.5% over the last week. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Al Hammadi Company For Development and Investment's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
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 Al Hammadi Company For Development and Investment is:
8.3% = ر.س143m ÷ ر.س1.7b (Based on the trailing twelve months to June 2021).
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 SAR0.08 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
A Side By Side comparison of Al Hammadi Company For Development and Investment's Earnings Growth And 8.3% ROE
It is hard to argue that Al Hammadi Company For Development and Investment's ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 9.3% either. So we are actually pleased to see that Al Hammadi Company For Development and Investment's net income grew at an acceptable rate of 7.9% over the last five years. We reckon that there could also be other factors at play that are influencing the company's growth. Such as - high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Al Hammadi Company For Development and Investment's growth is quite high when compared to the industry average growth of 6.3% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 4007? You can find out in our latest intrinsic value infographic research report.
Is Al Hammadi Company For Development and Investment Using Its Retained Earnings Effectively?
With a three-year median payout ratio of 46% (implying that the company retains 54% of its profits), it seems that Al Hammadi Company For Development and Investment is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
Moreover, Al Hammadi Company For Development and Investment is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 84% over the next three years. Regardless, the future ROE for Al Hammadi Company For Development and Investment is speculated to rise to 14% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.
In total, it does look like Al Hammadi Company For Development and Investment has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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.
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