Declining Stock and Solid Fundamentals: Is The Market Wrong About Aldrees Petroleum and Transport Services Company (TADAWUL:4200)?

It is hard to get excited after looking at Aldrees Petroleum and Transport Services' (TADAWUL:4200) recent performance, when its stock has declined 2.7% over the past week. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. 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 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 Aldrees Petroleum and Transport Services

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 Aldrees Petroleum and Transport Services is:

23% = ر.س300m ÷ ر.س1.3b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each SAR1 of shareholders' capital it has, the company made SAR0.23 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

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

At first glance, Aldrees Petroleum and Transport Services seems to have a decent ROE. Especially when compared to the industry average of 13% the company's ROE looks pretty impressive. Probably as a result of this, Aldrees Petroleum and Transport Services was able to see a decent growth of 11% over the last 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 2.9% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. 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 Making Efficient Use Of Its Profits?

Aldrees Petroleum and Transport Services has a significant three-year median payout ratio of 54%, meaning that it is left with only 46% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 59%. However, Aldrees Petroleum and Transport Services' ROE is predicted to rise to 28% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we feel that Aldrees Petroleum and Transport Services' performance has been quite good. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.