Has Riyad REIT Fund (TADAWUL:4330) Stock's Recent Performance Got Anything to Do With Its Financial Health?

Riyad REIT Fund's (TADAWUL:4330) stock up by 5.9% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. In this article, we decided to focus on Riyad REIT Fund'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.

See our latest analysis for Riyad REIT Fund

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 Riyad REIT Fund is:

3.8% = ر.س61m ÷ ر.س1.6b (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. That means that for every SAR1 worth of shareholders' equity, the company generated SAR0.04 in profit.

Why Is ROE Important For 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Riyad REIT Fund's Earnings Growth And 3.8% ROE

As you can see, Riyad REIT Fund's ROE looks pretty weak. Still, the company's ROE is higher than the average industry ROE of 2.4% so that's certainly interesting. Even more so, after seeing Riyad REIT Fund's exceptional 47% net income growth over the past five years. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. For instance, the company has a low payout ratio or is being managed efficiently

Next, on comparing with the industry net income growth, we found that Riyad REIT Fund's growth is quite high when compared to the industry average growth of 21% in the same period, which is great to see.

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

Is Riyad REIT Fund Efficiently Re-investing Its Profits?

Riyad REIT Fund has very a high LTM (or last twelve month) payout ratio of 383% suggesting that the company's shareholders are getting paid from more than just the company's earnings. In spite of this, the company was able to grow its earnings significantly, as we saw above. With that said, it could be worth keeping an eye on the high payout ratio as that's a huge risk. Our risks dashboard should have the 2 risks we have identified for Riyad REIT Fund.

Additionally, Riyad REIT Fund 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 Riyad REIT Fund has some positive aspects to its business. Especially the growth in earnings which was backed by a moderate ROE. Still, the ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. Up till now, we've only made a short study of the company's growth data. You can do your own research on Riyad REIT Fund and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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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