Is The Market Rewarding Riyadh Cement Company (TADAWUL:9512) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

It is hard to get excited after looking at Riyadh Cement's (TADAWUL:9512) recent performance, when its stock has declined 12% over the past three months. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. In this article, we decided to focus on Riyadh Cement's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Riyadh Cement

How To 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 Riyadh Cement is:

14% = ر.س234m ÷ ر.س1.7b (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each SAR1 of shareholders' capital it has, the company made SAR0.14 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

A Side By Side comparison of Riyadh Cement's Earnings Growth And 14% ROE

On the face of it, Riyadh Cement's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 6.9%, is definitely interesting. However, Riyadh Cement's five year net income growth was quite low averaging at only 4.2%. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the low growth in earnings could also be the result of this.

As a next step, we compared Riyadh Cement's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 4.2% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is 9512 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Riyadh Cement Efficiently Re-investing Its Profits?

Riyadh Cement has a three-year median payout ratio of 95% (implying that it keeps only 4.5% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

In addition, Riyadh Cement only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Summary

In total, we're a bit ambivalent about Riyadh Cement's performance. While the company has a decent earnings growth backed by a moderate ROE, we do think that it is reinvesting only a very small portion of its profits, which may hurt future growth. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.