Is Saudi Telecom Company's (TADAWUL:7010) Recent Price Movement Underpinned By Its Weak Fundamentals?

It is hard to get excited after looking at Saudi Telecom's (TADAWUL:7010) recent performance, when its stock has declined 13% over the past three months. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Saudi Telecom's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Saudi Telecom

How Is ROE Calculated?

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 Saudi Telecom is:

16% = ر.س13b ÷ ر.س78b (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.16.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Saudi Telecom's Earnings Growth And 16% ROE

On the face of it, Saudi Telecom's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 12% doesn't go unnoticed by us. Still, Saudi Telecom's net income growth of 3.0% over the past five years was mediocre at best. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. So that could be one of the factors that are causing earnings growth to stay low.

As a next step, we compared Saudi Telecom's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 12% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is 7010 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Saudi Telecom Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 71% (or a retention ratio of 29%), most of Saudi Telecom's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Moreover, Saudi Telecom has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 68%. Accordingly, forecasts suggest that Saudi Telecom's future ROE will be 17% which is again, similar to the current ROE.

Conclusion

On the whole, we feel that the performance shown by Saudi Telecom can be open to many interpretations. Specifically, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return. Investors may have benefitted, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.