Saudi Industrial Services Company's (TADAWUL:2190) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?

Saudi Industrial Services' (TADAWUL:2190) stock is up by a considerable 14% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Particularly, we will be paying attention to Saudi Industrial Services' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Saudi Industrial Services

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 Industrial Services is:

6.4% = ر.س150m ÷ ر.س2.4b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each SAR1 of shareholders' capital it has, the company made SAR0.06 in profit.

What Has ROE Got To Do With 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 Industrial Services' Earnings Growth And 6.4% ROE

It is quite clear that Saudi Industrial Services' ROE is rather low. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 7.0%. Therefore, it might not be wrong to say that the five year net income decline of 3.1% seen by Saudi Industrial Services was possibly a result of the disappointing ROE.

However, when we compared Saudi Industrial Services' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 6.6% in the same period. This is quite worrisome.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Saudi Industrial Services''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Saudi Industrial Services Efficiently Re-investing Its Profits?

With a three-year median payout ratio as high as 113%,Saudi Industrial Services' shrinking earnings don't come as a surprise as the company is paying a dividend which is beyond its means. Paying a dividend higher than reported profits is not a sustainable move.

Additionally, Saudi Industrial Services has paid dividends over a period of nine years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 55% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Summary

In total, we would have a hard think before deciding on any investment action concerning Saudi Industrial Services. Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.