Will Weakness in Arabian Internet and Communication Services Company's (TADAWUL:7202) Stock Prove Temporary Given Strong Fundamentals?

Arabian Internet and Communication Services (TADAWUL:7202) has had a rough three months with its share price down 16%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Arabian Internet and Communication Services' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How Do You Calculate Return On Equity?

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:

37% = ر.س1.6b ÷ ر.س4.4b (Based on the trailing twelve months to March 2025).

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 SAR0.37 in profit.

View our latest analysis for Arabian Internet and Communication Services

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.

Arabian Internet and Communication Services' Earnings Growth And 37% ROE

Firstly, we acknowledge that Arabian Internet and Communication Services has a significantly high ROE. Secondly, even when compared to the industry average of 28% the company's ROE is quite impressive. Probably as a result of this, Arabian Internet and Communication Services was able to see a decent net income growth of 19% over the last five years.

We then performed a comparison between Arabian Internet and Communication Services' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 18% in the same 5-year period.

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). Doing so will help them establish if the stock's future looks promising or ominous. 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 Efficiently Re-investing Its Profits?

Arabian Internet and Communication Services has a significant three-year median payout ratio of 53%, meaning that it is left with only 47% 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.

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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 63%. As a result, Arabian Internet and Communication Services' ROE is not expected to change by much either, which we inferred from the analyst estimate of 33% for future ROE.

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.