Has Basic Chemical Industries Company (TADAWUL:1210) Stock's Recent Performance Got Anything to Do With Its Financial Health?

Most readers would already know that Basic Chemical Industries' (TADAWUL:1210) stock increased by 7.3% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. In this article, we decided to focus on Basic Chemical Industries' ROE.

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

See our latest analysis for Basic Chemical Industries

How Do You 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 Basic Chemical Industries is:

9.8% = ر.س60m ÷ ر.س612m (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 SAR0.10 in profit.

What Is The Relationship Between ROE And 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 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.

Basic Chemical Industries' Earnings Growth And 9.8% ROE

It is quite clear that Basic Chemical Industries' ROE is rather low. However, when compared to the industry average of 7.2%, we do feel there's definitely more to the company. However, Basic Chemical Industries has seen a net income growth of only 2.9% over the past five years, which is not very much. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the low growth in earnings could also be the result of this.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Basic Chemical Industries compares quite favourably to the industry average, which shows a decline of 4.7% in the same period.

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. If you're wondering about Basic Chemical Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Basic Chemical Industries Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 60% (that is, the company retains only 40% of its income) over the past three years for Basic Chemical Industries suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, Basic Chemical Industries has paid dividends over a period of eight 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, we do feel that Basic Chemical Industries has some positive attributes. Specifically, its respectable ROE which likely led to the considerable growth in earnings. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 1 risk we have identified for Basic Chemical Industries by visiting our risks dashboard for free on our platform here.

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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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