Is Umm Al-Qura Cement Company's (TADAWUL:3005) Latest Stock Performance A Reflection Of Its Financial Health?

Most readers would already be aware that Umm Al-Qura Cement's (TADAWUL:3005) stock increased significantly by 12% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Umm Al-Qura Cement'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Umm Al-Qura Cement

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 Umm Al-Qura Cement is:

17% = ر.س119m ÷ ر.س694m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.17 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Umm Al-Qura Cement's Earnings Growth And 17% ROE

To begin with, Umm Al-Qura Cement seems to have a respectable ROE. On comparing with the average industry ROE of 9.1% the company's ROE looks pretty remarkable. Probably as a result of this, Umm Al-Qura Cement was able to see an impressive net income growth of 56% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Given that the industry shrunk its earnings at a rate of 22% in the same period, the net income growth of the company is quite impressive.

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. If you're wondering about Umm Al-Qura Cement's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Umm Al-Qura Cement Using Its Retained Earnings Effectively?

The three-year median payout ratio for Umm Al-Qura Cement is 27%, which is moderately low. The company is retaining the remaining 73%. By the looks of it, the dividend is well covered and Umm Al-Qura Cement is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While Umm Al-Qura Cement 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's future payout ratio is expected to drop to 16% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

Summary

Overall, we are quite pleased with Umm Al-Qura Cement's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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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