Riyadh Cement Company's (TADAWUL:3092) Stock's Been Going Strong: Could Weak Financials Mean The Market Will Correct Its Share Price?

Riyadh Cement (TADAWUL:3092) has had a great run on the share market with its stock up by a significant 17% over the last month. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Particularly, we will be paying attention to Riyadh Cement'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Riyadh Cement

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Riyadh Cement is:

16% = ر.س273m ÷ ر.س1.7b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.16.

Why Is ROE Important For 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. 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.

A Side By Side comparison of Riyadh Cement's Earnings Growth And 16% ROE

It is quite clear that Riyadh Cement's ROE is rather low. However, the fact that it is higher than the industry average of 7.0% makes us a bit more interested. However, Riyadh Cement has seen a flattish net income growth over the past five years, which is not saying much. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the disappointing earnings growth.

As a next step, we compared Riyadh Cement's performance with the industry and discovered the industry has shrunk at a rate of 4.9% in the same period meaning that the company has been shrinking its earnings at a rate lower than the industry. This does offer shareholders some relief

Earnings growth is a huge factor in stock valuation. 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. Is Riyadh Cement fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Riyadh Cement Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 98% (implying that the company keeps only 1.7% of its income) of its business to reinvest into its business), most of Riyadh Cement's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, Riyadh Cement has been paying dividends over a period of four years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

Overall, we would be extremely cautious before making any decision on Riyadh Cement. Its earnings growth particularly is not much to talk about even though it does have a pretty respectable ROE. The lack of growth can be blamed on its poor earnings retention. As discussed earlier, the company is retaining hardly any of its profits. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Riyadh Cement and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.