Are Arriyadh Development Co.'s (TADAWUL:4150) Mixed Financials Driving The Negative Sentiment?

It is hard to get excited after looking at Arriyadh Development's (TADAWUL:4150) recent performance, when its stock has declined 1.5% over the past month. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on Arriyadh Development's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Arriyadh Development

How To Calculate Return On Equity?

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 Arriyadh Development is:

8.8% = ر.س177m ÷ ر.س2.0b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.09 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. 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.

Arriyadh Development's Earnings Growth And 8.8% ROE

It is hard to argue that Arriyadh Development's ROE is much good in and of itself. Still, the company's ROE is higher than the average industry ROE of 3.2% so that's certainly interesting. But seeing Arriyadh Development's five year net income decline of 12% over the past five years, we might rethink that. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the shrinking earnings.

From the 14% decline reported by the industry in the same period, we infer that Arriyadh Development and its industry are both shrinking at a similar rate.

Earnings growth is a huge factor in stock valuation. 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 Arriyadh Development fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Arriyadh Development Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 89% (implying that 11% of the profits are retained), most of Arriyadh Development's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. Our risks dashboard should have the 2 risks we have identified for Arriyadh Development.

Moreover, Arriyadh Development 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.

Summary

On the whole, we feel that the performance shown by Arriyadh Development can be open to many interpretations. Primarily, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE. Bear in mind, the company reinvests a small portion of its profits, which explains the lack of growth. 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 Arriyadh 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. 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.
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