Is Jarir Marketing Company's (TADAWUL:4190) Recent Price Movement Underpinned By Its Weak Fundamentals?

It is hard to get excited after looking at Jarir Marketing's (TADAWUL:4190) recent performance, when its stock has declined 5.9% over the past three months. 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. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Jarir Marketing's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 Jarir Marketing

How Is ROE Calculated?

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 Jarir Marketing is:

55% = ر.س945m ÷ ر.س1.7b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.55 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. 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.

A Side By Side comparison of Jarir Marketing's Earnings Growth And 55% ROE

Firstly, we acknowledge that Jarir Marketing has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 12% also doesn't go unnoticed by us. However, we are curious as to how the high returns still resulted in a flat growth for Jarir Marketing in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing with the industry net income growth, we found that Jarir Marketing's reported growth was a little less than the industry growth of1.3% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Has the market priced in the future outlook for 4190? You can find out in our latest intrinsic value infographic research report.

Is Jarir Marketing Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 97% (meaning, the company retains only 2.8% of profits) for Jarir Marketing suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Jarir Marketing has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 100% of its profits over the next three years. As a result, Jarir Marketing's ROE is not expected to change by much either, which we inferred from the analyst estimate of 57% for future ROE.

Summary

Overall, we have mixed feelings about Jarir Marketing. Despite the high ROE, the company has a disappointing earnings growth number, due to its poor rate of reinvestment into its business. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com