Basic Chemical Industries Company's (TADAWUL:1210) Dismal Stock Performance Reflects Weak Fundamentals

Basic Chemical Industries (TADAWUL:1210) has had a rough three months with its share price down 17%. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Particularly, we will be paying attention to Basic Chemical Industries' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Basic Chemical Industries

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 Basic Chemical Industries is:

7.1% = ر.س49m ÷ ر.س684m (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.07.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Basic Chemical Industries' Earnings Growth And 7.1% ROE

It is hard to argue that Basic Chemical Industries' ROE is much good in and of itself. However, the fact that it is higher than the industry average of 5.2% makes us a bit more interested. But then again, seeing that Basic Chemical Industries' five year net income shrunk at a rate of 21% in the past five years, makes us think again. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the decline in earnings could also be the result of this.

However, when we compared Basic Chemical Industries' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 0.7% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Basic Chemical Industries is trading on a high P/E or a low P/E, relative to its industry.

Is Basic Chemical Industries Using Its Retained Earnings Effectively?

Basic Chemical Industries' very high three-year median payout ratio of 107% over the last three years suggests that the company is paying its shareholders more than what it is earning and this explains the company's shrinking earnings. Paying a dividend beyond their means is usually not viable over the long term. To know the 3 risks we have identified for Basic Chemical Industries visit our risks dashboard for free.

Additionally, Basic Chemical Industries has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

On the whole, Basic Chemical Industries' performance is quite a big let-down. The company has shown a disappointing growth in its earnings as a result of it retaining little to almost none of its profits. So, the decent ROE it does have, is not much useful to investors given that the company is reinvesting very little into its business. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Basic Chemical Industries' 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.

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