Saudi Aramco Base Oil Company - Luberef (TADAWUL:2223) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

With its stock down 22% over the past three months, it is easy to disregard Saudi Aramco Base Oil Company - Luberef (TADAWUL:2223). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Saudi Aramco Base Oil Company - Luberef's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Saudi Aramco Base Oil Company - Luberef

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Saudi Aramco Base Oil Company - Luberef is:

31% = ر.س1.3b ÷ ر.س4.3b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each SAR1 of shareholders' capital it has, the company made SAR0.31 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. 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.

Saudi Aramco Base Oil Company - Luberef's Earnings Growth And 31% ROE

At first glance, Saudi Aramco Base Oil Company - Luberef seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 6.2%. This certainly adds some context to Saudi Aramco Base Oil Company - Luberef's exceptional 33% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Saudi Aramco Base Oil Company - Luberef's growth is quite high when compared to the industry average growth of 16% 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 2223 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Saudi Aramco Base Oil Company - Luberef Using Its Retained Earnings Effectively?

Saudi Aramco Base Oil Company - Luberef's significant three-year median payout ratio of 81% (where it is retaining only 19% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

While Saudi Aramco Base Oil Company - Luberef has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 87% of its profits over the next three years. Accordingly, forecasts suggest that Saudi Aramco Base Oil Company - Luberef's future ROE will be 29% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Saudi Aramco Base Oil Company - Luberef's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.

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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.