Jamjoom Pharmaceuticals Factory Company's (TADAWUL:4015) Stock Has Shown A Decent Performance: Have Financials A Role To Play?

Most readers would already know that Jamjoom Pharmaceuticals Factory's (TADAWUL:4015) stock increased by 4.3% over the past month. As most would know, long-term fundamentals have a strong correlation with market price movements, 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. Specifically, we decided to study Jamjoom Pharmaceuticals Factory's ROE in this article.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Jamjoom Pharmaceuticals Factory

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 Jamjoom Pharmaceuticals Factory is:

21% = ر.س280m ÷ ر.س1.4b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.21.

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 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.

Jamjoom Pharmaceuticals Factory's Earnings Growth And 21% ROE

At first glance, Jamjoom Pharmaceuticals Factory's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 9.3% doesn't go unnoticed by us. Consequently, this likely laid the ground for the decent growth of 9.5% seen over the past five years by Jamjoom Pharmaceuticals Factory. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence there might be some other aspects that are causing earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

We then compared Jamjoom Pharmaceuticals Factory's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 12% in the same 5-year period, which is a bit concerning.

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). This then helps them determine if the stock is placed for a bright or bleak future. 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 Jamjoom Pharmaceuticals Factory is trading on a high P/E or a low P/E, relative to its industry.

Is Jamjoom Pharmaceuticals Factory Making Efficient Use Of Its Profits?

Jamjoom Pharmaceuticals Factory has a three-year median payout ratio of 27%, which implies that it retains the remaining 73% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 70% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Conclusion

In total, it does look like Jamjoom Pharmaceuticals Factory has some positive aspects to its business. In particular, it's great to see that the company is investing heavily into its business and along with a moderate rate of return, that has resulted in a respectable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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. 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.