Banan Real Estate Company's (TADAWUL:9519) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Banan Real Estate (TADAWUL:9519) has had a great run on the share market with its stock up by a significant 12% over the last month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Banan Real Estate's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Banan Real Estate

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Banan Real Estate is:

8.7% = ر.س49m ÷ ر.س560m (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. That means that for every SAR1 worth of shareholders' equity, the company generated SAR0.09 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. 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 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.

Banan Real Estate's Earnings Growth And 8.7% ROE

It is quite clear that Banan Real Estate's ROE is rather low. Further, we noted that the company's ROE is similar to the industry average of 9.5%. Looking at Banan Real Estate's exceptional 22% five-year net income growth in particular, we are definitely impressed. Given the low ROE, it is likely that there could be some other reasons behind this growth as well. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Banan Real Estate's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 19% in the same 5-year 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Banan Real Estate is trading on a high P/E or a low P/E, relative to its industry.

Is Banan Real Estate Efficiently Re-investing Its Profits?

Banan Real Estate has a three-year median payout ratio of 37% (where it is retaining 63% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Banan Real Estate is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Banan Real Estate has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, it does look like Banan Real Estate has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 1 risk we have identified for Banan Real Estate visit our risks dashboard for free.

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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.