Is Al Hammadi Company For Development and Investment's (TADAWUL:4007) Stock On A Downtrend As A Result Of Its Poor Financials?

It is hard to get excited after looking at Al Hammadi Company For Development and Investment's (TADAWUL:4007) recent performance, when its stock has declined 5.8% over the past three months. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Specifically, we decided to study Al Hammadi Company For Development and Investment's ROE in this article.

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.

View our latest analysis for Al Hammadi Company For Development and Investment

How To 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 Al Hammadi Company For Development and Investment is:

7.7% = ر.س128m ÷ ر.س1.7b (Based on the trailing twelve months to September 2020).

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 SAR0.08 in profit.

Why Is ROE Important For 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.

A Side By Side comparison of Al Hammadi Company For Development and Investment's Earnings Growth And 7.7% ROE

It is quite clear that Al Hammadi Company For Development and Investment's ROE is rather low. 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 3.4% seen by Al Hammadi Company For Development and Investment was possibly a result of the disappointing ROE.

As a next step, we compared Al Hammadi Company For Development and Investment's performance with the industry and discovered the industry has shrunk at a rate of 7.1% in the same period meaning that the company has been shrinking its earnings at a rate lower than the industry. This does appease the negative sentiment around the company to a certain extent.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is 4007 worth today? The intrinsic value infographic in our free research report helps visualize whether 4007 is currently mispriced by the market.

Is Al Hammadi Company For Development and Investment Using Its Retained Earnings Effectively?

While the company did payout a portion of its dividend in the past, it currently doesn't pay a dividend. This implies that potentially all of its profits are being reinvested in the business.

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 71%. Still, forecasts suggest that Al Hammadi Company For Development and Investment's future ROE will rise to 11% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, Al Hammadi Company For Development and Investment'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. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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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