Saudi Research and Media Group (TADAWUL:4210) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

It is hard to get excited after looking at Saudi Research and Media Group's (TADAWUL:4210) recent performance, when its stock has declined 6.2% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Saudi Research and Media Group's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Saudi Research and Media Group

How Is ROE Calculated?

ROE 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 Saudi Research and Media Group is:

14% = ر.س475m ÷ ر.س3.3b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. That means that for every SAR1 worth of shareholders' equity, the company generated SAR0.14 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

Saudi Research and Media Group's Earnings Growth And 14% ROE

It is quite clear that Saudi Research and Media Group's ROE is rather low. However, the fact that it is higher than the industry average of 7.4% makes us a bit more interested. Particularly, the substantial 28% net income growth seen by Saudi Research and Media Group over the past five years is impressive . That being said, the company does have a low ROE to begin with, just that its higher than the industry average. So there might well be other reasons for the earnings to grow. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Saudi Research and Media Group's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.4%.

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). Doing so will help them establish if the stock's future looks promising or ominous. Is Saudi Research and Media Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Saudi Research and Media Group Using Its Retained Earnings Effectively?

Given that Saudi Research and Media Group doesn't pay any regular dividends to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, we are pretty happy with Saudi Research and Media Group's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts 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.