Is Makkah Construction and Development Company's (TADAWUL:4100) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that Makkah Construction and Development's (TADAWUL:4100) stock increased significantly by 6.4% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Makkah Construction and Development's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Makkah Construction and Development

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 Makkah Construction and Development is:

9.1% = ر.س404m ÷ ر.س4.4b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every SAR1 worth of shareholders' equity, the company generated SAR0.09 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Makkah Construction and Development's Earnings Growth And 9.1% ROE

It is hard to argue that Makkah Construction and Development's ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 11% either. Looking at Makkah Construction and Development's exceptional 27% five-year net income growth in particular, we are definitely impressed. We reckon that there could also be other factors at play thats influencing the company's growth. Such as - high earnings retention or an efficient management in place.

We then compared Makkah Construction and Development's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 22% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Makkah Construction and Development fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Makkah Construction and Development Efficiently Re-investing Its Profits?

Makkah Construction and Development's significant three-year median payout ratio of 63% (where it is retaining only 37% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Additionally, Makkah Construction and Development has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, it does look like Makkah Construction and Development has some positive aspects to its business. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Makkah Construction and Development's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.