Is Saudi Basic Industries Corporation's (TADAWUL:2010) Recent Performance Underpinned By Weak Financials?

It is hard to get excited after looking at Saudi Basic Industries' (TADAWUL:2010) recent performance, when its stock has declined 7.4% over the past month. 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 Saudi Basic Industries' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Saudi Basic Industries

How Is ROE Calculated?

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 Saudi Basic Industries is:

1.9% = ر.س3.7b ÷ ر.س195b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. That means that for every SAR1 worth of shareholders' equity, the company generated SAR0.02 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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 Saudi Basic Industries' Earnings Growth And 1.9% ROE

It is quite clear that Saudi Basic Industries' ROE is rather low. Not just that, even compared to the industry average of 6.5%, the company's ROE is entirely unremarkable. As a result, Saudi Basic Industries' flat earnings over the past five years doesn't come as a surprise given its lower ROE.

Next, on comparing with the industry net income growth, we found that Saudi Basic Industries' reported growth was lower than the industry growth of 16% over the last few years, which is not something we like 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. What is 2010 worth today? The intrinsic value infographic in our free research report helps visualize whether 2010 is currently mispriced by the market.

Is Saudi Basic Industries Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 81% (meaning, the company retains only 19% of profits) for Saudi Basic Industries suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Moreover, Saudi Basic Industries has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 66%. Regardless, the future ROE for Saudi Basic Industries is predicted to rise to 8.6% despite there being not much change expected in its payout ratio.

Summary

In total, we would have a hard think before deciding on any investment action concerning Saudi Basic Industries. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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.