Yanbu National Petrochemical Company's (TADAWUL:2290) Dismal Stock Performance Reflects Weak Fundamentals

By
Simply Wall St
Published
November 21, 2021
SASE:2290
Source: Shutterstock

Yanbu National Petrochemical (TADAWUL:2290) has had a rough month with its share price down 15%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Yanbu National Petrochemical's ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Yanbu National Petrochemical

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 Yanbu National Petrochemical is:

10% = ر.س1.5b ÷ ر.س15b (Based on the trailing twelve months to September 2021).

The 'return' is the profit over the last twelve months. That means that for every SAR1 worth of shareholders' equity, the company generated SAR0.10 in profit.

What Has ROE Got To Do With 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. 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.

Yanbu National Petrochemical's Earnings Growth And 10% ROE

It is hard to argue that Yanbu National Petrochemical's ROE is much good in and of itself. Even when compared to the industry average of 15%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 21% seen by Yanbu National Petrochemical was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 2.6% in the same period, we still found Yanbu National Petrochemical's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

past-earnings-growth
SASE:2290 Past Earnings Growth November 22nd 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 2290? You can find out in our latest intrinsic value infographic research report.

Is Yanbu National Petrochemical Making Efficient Use Of Its Profits?

Yanbu National Petrochemical's very high three-year median payout ratio of 142% 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 higher than reported profits is not a sustainable move. To know the 2 risks we have identified for Yanbu National Petrochemical visit our risks dashboard for free.

Moreover, Yanbu National Petrochemical has been paying dividends for eight years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 84% over the next three years. As a result, the expected drop in Yanbu National Petrochemical's payout ratio explains the anticipated rise in the company's future ROE to 16%, over the same period.

Conclusion

On the whole, Yanbu National Petrochemical's performance is quite a big let-down. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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