Is Zahrat Al Waha For Trading Company's (TADAWUL:3007) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Zahrat Al Waha For Trading's (TADAWUL:3007) stock is up by a considerable 28% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Zahrat Al Waha For Trading's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Zahrat Al Waha For Trading

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Zahrat Al Waha For Trading is:

21% = ر.س49m ÷ ر.س238m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.21.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Zahrat Al Waha For Trading's Earnings Growth And 21% ROE

To begin with, Zahrat Al Waha For Trading seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 8.0%. Despite this, Zahrat Al Waha For Trading's five year net income growth was quite low averaging at only 2.2%. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared Zahrat Al Waha For Trading's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 7.2% in the same period.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Zahrat Al Waha For Trading is trading on a high P/E or a low P/E, relative to its industry.

Is Zahrat Al Waha For Trading Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 39% (implying that the company retains the remaining 61% of its income), Zahrat Al Waha For Trading's earnings growth was quite low. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Additionally, Zahrat Al Waha For Trading has paid dividends over a period of three years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, it does look like Zahrat Al Waha For Trading has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. 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. Our risks dashboard will have the 1 risk we have identified for Zahrat Al Waha For Trading.

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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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