Is Arabian Internet and Communication Services Company's (TADAWUL:7202) Stock's Recent Performance A Reflection Of Its Financial Health?

Most readers would already know that Arabian Internet and Communication Services' (TADAWUL:7202) stock increased by 8.1% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Arabian Internet and Communication Services' ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Arabian Internet and Communication Services

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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:

39% = ر.س1.4b ÷ ر.س3.7b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each SAR1 of shareholders' capital it has, the company made SAR0.39 in profit.

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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Arabian Internet and Communication Services' Earnings Growth And 39% ROE

First thing first, we like that Arabian Internet and Communication Services has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 30% also doesn't go unnoticed by us. Under the circumstances, Arabian Internet and Communication Services' considerable five year net income growth of 20% was to be expected.

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 20% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Arabian Internet and Communication Services''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

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.

Besides, Arabian Internet and Communication Services has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 64% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 31%, over the same period.

Summary

In total, we are pretty happy with Arabian Internet and Communication 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.

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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.