Stock Analysis

Weak Financial Prospects Seem To Be Dragging Down Abdullah Saad Mohammed Abo Moati Stationaries Company (TADAWUL:4191) Stock

SASE:4191
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With its stock down 9.8% over the past month, it is easy to disregard Abdullah Saad Mohammed Abo Moati Stationaries (TADAWUL:4191). Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Specifically, we decided to study Abdullah Saad Mohammed Abo Moati Stationaries' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Abdullah Saad Mohammed Abo Moati Stationaries

How Do You 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 Abdullah Saad Mohammed Abo Moati Stationaries is:

3.9% = ر.س9.2m ÷ ر.س232m (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.04 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 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 3.9% ROE

As you can see, Abdullah Saad Mohammed Abo Moati Stationaries' ROE looks pretty weak. Even when compared to the industry average of 15%, the ROE figure is pretty disappointing. For this reason, Abdullah Saad Mohammed Abo Moati Stationaries' five year net income decline of 6.7% is not surprising given its lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. 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 March 18th 2021

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Abdullah Saad Mohammed Abo Moati Stationaries fairly valued compared to other companies? These 3 valuation measures might help you decide.

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

With a high three-year median payout ratio of 74% (implying that 26% of the profits are retained), most of Abdullah Saad Mohammed Abo Moati Stationaries' profits are being paid to shareholders, which explains the company's shrinking earnings. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run.

Additionally, Abdullah Saad Mohammed Abo Moati Stationaries started paying a dividend only recently. So it looks like the management may have perceived that shareholders favor dividends even though earnings have been in decline.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Abdullah Saad Mohammed Abo Moati Stationaries. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Abdullah Saad Mohammed Abo Moati Stationaries' 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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