Taiba Investment Company's (TADAWUL:4090) Stock Been Rising But Financials Look Weak: Should Shareholders Be Worried?

Most readers would already know that Taiba Investment's (TADAWUL:4090) stock increased by 9.3% over the past three months. However, in this article, we decided to focus on its weak financials, as long-term fundamentals ultimately dictate market outcomes. Particularly, we will be paying attention to Taiba Investment'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.

See our latest analysis for Taiba Investment

How To 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 Taiba Investment is:

2.3% = ر.س160m ÷ ر.س6.9b (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 SAR0.02 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Taiba Investment's Earnings Growth And 2.3% ROE

As you can see, Taiba Investment's ROE looks pretty weak. Even when compared to the industry average of 8.1%, the ROE figure is pretty disappointing. Thus, the low net income growth of 4.9% seen by Taiba Investment over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared Taiba Investment's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 13% in the same period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Taiba Investment fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Taiba Investment Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 80% (that is, the company retains only 20% of its income) over the past three years for Taiba Investment suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Moreover, Taiba Investment has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 49% over the next three years. As a result, the expected drop in Taiba Investment's payout ratio explains the anticipated rise in the company's future ROE to 5.9%, over the same period.

Summary

Overall, we would be extremely cautious before making any decision on Taiba Investment. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. In brief, we think the company is risky and investors should think twice before making any final judgement on this company. Our risks dashboard would have the 3 risks we have identified for Taiba Investment.

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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.

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