Al Jouf Cement Company's (TADAWUL:3091) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Al Jouf Cement (TADAWUL:3091) has had a great run on the share market with its stock up by a significant 20% over the last three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Al Jouf Cement's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Al Jouf Cement

How Is ROE Calculated?

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 Al Jouf Cement is:

2.1% = ر.س33m ÷ ر.س1.6b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. That means that for every SAR1 worth of shareholders' equity, the company generated SAR0.02 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Al Jouf Cement's Earnings Growth And 2.1% ROE

As you can see, Al Jouf Cement's ROE looks pretty weak. Not just that, even compared to the industry average of 9.1%, the company's ROE is entirely unremarkable. For this reason, Al Jouf Cement's five year net income decline of 45% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

As a next step, we compared Al Jouf Cement's performance with the industry and found thatAl Jouf Cement's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 22% in the same period, which is a slower than the company.

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Al Jouf Cement is trading on a high P/E or a low P/E, relative to its industry.

Is Al Jouf Cement Efficiently Re-investing Its Profits?

Because Al Jouf Cement doesn't pay any dividends, we infer that it is retaining all of its profits, which is rather perplexing when you consider the fact that there is no earnings growth to show for it. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Conclusion

Overall, we have mixed feelings about Al Jouf Cement. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Additionally, the latest industry analyst forecasts show that analysts expect the company's earnings to continue to shrink in the future. 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. 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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