Arabian Internet and Communication Services Company's (TADAWUL:7202) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

Arabian Internet and Communication Services (TADAWUL:7202) has had a rough three months with its share price down 25%. 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. In this article, we decided to focus on Arabian Internet and Communication Services' 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Arabian Internet and Communication Services

How To 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 Arabian Internet and Communication Services is:

35% = ر.س1.2b ÷ ر.س3.5b (Based on the trailing twelve months to March 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 SAR0.35 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of Arabian Internet and Communication Services' Earnings Growth And 35% ROE

Firstly, we acknowledge that Arabian Internet and Communication Services has a significantly high ROE. Additionally, a comparison with the average industry ROE of 32% also portrays the company's ROE in a good light. Therefore, it might not be wrong to say that the impressive five year 21% net income growth seen by Arabian Internet and Communication Services was probably achieved as a result of the high ROE.

As a next step, we compared Arabian Internet and Communication Services' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 21% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Arabian Internet and Communication Services fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Arabian Internet and Communication Services Using Its Retained Earnings Effectively?

Arabian Internet and Communication Services has a significant three-year median payout ratio of 52%, meaning the company only retains 48% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

While Arabian Internet and Communication Services has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 64% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Conclusion

On the whole, we feel that Arabian Internet and Communication Services' performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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.

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