Is The Market Rewarding Baazeem Trading Co. (TADAWUL:4051) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

By
Simply Wall St
Published
October 10, 2021
SASE:4051
Source: Shutterstock

With its stock down 22% over the past three months, it is easy to disregard Baazeem Trading (TADAWUL:4051). 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. Specifically, we decided to study Baazeem Trading's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Baazeem Trading

How To Calculate Return On Equity?

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 Baazeem Trading is:

14% = ر.س25m ÷ ر.س188m (Based on the trailing twelve months to June 2021).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.14 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. 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 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.

A Side By Side comparison of Baazeem Trading's Earnings Growth And 14% ROE

At first glance, Baazeem Trading's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 5.8% which we definitely can't overlook. But seeing Baazeem Trading's five year net income decline of 6.9% over the past five years, we might rethink that. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the shrinking earnings.

That being said, we compared Baazeem Trading's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 7.5% in the same period.

past-earnings-growth
SASE:4051 Past Earnings Growth October 11th 2021

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Baazeem Trading fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Baazeem Trading Making Efficient Use Of Its Profits?

Baazeem Trading's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 70% (or a retention ratio of 30%). With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 3 risks we have identified for Baazeem Trading by visiting our risks dashboard for free on our platform here.

In addition, Baazeem Trading has been paying dividends over a period of five years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Summary

In total, we're a bit ambivalent about Baazeem Trading's performance. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Baazeem Trading's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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