Could The Market Be Wrong About Aldrees Petroleum and Transport Services Company (TADAWUL:4200) Given Its Attractive Financial Prospects?

Aldrees Petroleum and Transport Services (TADAWUL:4200) has had a rough three months with its share price down 8.4%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Aldrees Petroleum and Transport Services' ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Aldrees Petroleum and Transport Services

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Aldrees Petroleum and Transport Services is:

23% = ر.س317m ÷ ر.س1.4b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.23 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 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.

Aldrees Petroleum and Transport Services' Earnings Growth And 23% ROE

To start with, Aldrees Petroleum and Transport Services' ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 18%. This probably laid the ground for Aldrees Petroleum and Transport Services' moderate 8.7% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Aldrees Petroleum and Transport Services' growth is quite high when compared to the industry average growth of 1.7% 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Aldrees Petroleum and Transport Services is trading on a high P/E or a low P/E, relative to its industry.

Is Aldrees Petroleum and Transport Services Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 54% (or a retention ratio of 46%) for Aldrees Petroleum and Transport Services suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Aldrees Petroleum and Transport Services is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 41% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 30%, over the same period.

Conclusion

Overall, we are quite pleased with Aldrees Petroleum and Transport Services' performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.

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

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.