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

With its stock down 5.4% over the past three months, it is easy to disregard Arabian Internet and Communication Services (TADAWUL:7202). 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. Specifically, we decided to study Arabian Internet and Communication Services' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 Is ROE Calculated?

The formula for ROE 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:

42% = ر.س1.4b ÷ ر.س3.3b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.42.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 Arabian Internet and Communication Services' Earnings Growth And 42% ROE

Firstly, we acknowledge that Arabian Internet and Communication Services has a significantly high ROE. Secondly, even when compared to the industry average of 33% the company's ROE is quite impressive. Under the circumstances, Arabian Internet and Communication Services' considerable five year net income growth of 20% was to be expected.

Next, on comparing Arabian Internet and Communication Services' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 20% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 7202 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Arabian Internet and Communication Services Efficiently Re-investing Its Profits?

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.

Additionally, Arabian Internet and Communication Services has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 62% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 35%.

Conclusion

Overall, we are quite pleased with Arabian Internet and Communication Services' performance. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.