Stock Analysis

Can Mixed Fundamentals Have A Negative Impact on Abdullah Saad Mohammed Abo Moati Stationaries Company (TADAWUL:4191) Current Share Price Momentum?

SASE:4191
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Abdullah Saad Mohammed Abo Moati Stationaries (TADAWUL:4191) has had a great run on the share market with its stock up by a significant 69% over the last month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Abdullah Saad Mohammed Abo Moati Stationaries' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Abdullah Saad Mohammed Abo Moati Stationaries

How Is ROE Calculated?

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 Abdullah Saad Mohammed Abo Moati Stationaries is:

4.4% = ر.س10m ÷ ر.س230m (Based on the trailing twelve months to September 2020).

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 SAR0.04 in profit.

Why Is ROE Important For 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 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 Abdullah Saad Mohammed Abo Moati Stationaries' Earnings Growth And 4.4% ROE

It is quite clear that Abdullah Saad Mohammed Abo Moati Stationaries' ROE is rather low. Even compared to the average industry ROE of 15%, the company's ROE is quite dismal. For this reason, Abdullah Saad Mohammed Abo Moati Stationaries' five year net income decline of 4.4% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

So, as a next step, we compared Abdullah Saad Mohammed Abo Moati Stationaries' performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 6.9% in the same period.

past-earnings-growth
SASE:4191 Past Earnings Growth December 11th 2020

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Abdullah Saad Mohammed Abo Moati Stationaries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Abdullah Saad Mohammed Abo Moati Stationaries Using Its Retained Earnings Effectively?

Conclusion

Overall, we have mixed feelings about Abdullah Saad Mohammed Abo Moati Stationaries. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 2 risks we have identified for Abdullah Saad Mohammed Abo Moati Stationaries visit our risks dashboard for free.

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Valuation is complex, but we're helping make it simple.

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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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