Declining Stock and Decent Financials: Is The Market Wrong About Al Hammadi Holding Company (TADAWUL:4007)?

With its stock down 6.2% over the past three months, it is easy to disregard Al Hammadi Holding (TADAWUL:4007). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Al Hammadi Holding's ROE.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Al Hammadi Holding

How Do You Calculate Return On Equity?

Return on equity 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 Holding is:

17% = ر.س326m ÷ ر.س1.9b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. That means that for every SAR1 worth of shareholders' equity, the company generated SAR0.17 in profit.

Why Is ROE Important For Earnings Growth?

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

Al Hammadi Holding's Earnings Growth And 17% ROE

On the face of it, Al Hammadi Holding's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 16%, we may spare it some thought. Moreover, we are quite pleased to see that Al Hammadi Holding's net income grew significantly at a rate of 35% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this 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 Holding's growth is quite high when compared to the industry average growth of 20% in the same period, which is great to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 4007 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Al Hammadi Holding Using Its Retained Earnings Effectively?

Al Hammadi Holding has a significant three-year median payout ratio of 74%, meaning the company only retains 26% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Additionally, Al Hammadi Holding has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 67%. As a result, Al Hammadi Holding's ROE is not expected to change by much either, which we inferred from the analyst estimate of 19% for future ROE.

Conclusion

In total, it does look like Al Hammadi Holding has some positive aspects to its business. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.