Are Strong Financial Prospects The Force That Is Driving The Momentum In SAL Saudi Logistics Services Company's TADAWUL:4263) Stock?

Most readers would already be aware that SAL Saudi Logistics Services' (TADAWUL:4263) stock increased significantly by 16% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to SAL Saudi Logistics 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 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 SAL Saudi Logistics Services

How Do You Calculate Return On Equity?

ROE 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 SAL Saudi Logistics Services is:

46% = ر.س614m ÷ ر.س1.3b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.46 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. 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 SAL Saudi Logistics Services' Earnings Growth And 46% ROE

First thing first, we like that SAL Saudi Logistics Services has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 7.5% which is quite remarkable. So, the substantial 29% net income growth seen by SAL Saudi Logistics Services over the past five years isn't overly surprising.

As a next step, we compared SAL Saudi Logistics Services' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 14%.

Earnings growth is an important metric to consider when valuing a stock. 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 SAL Saudi Logistics Services''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is SAL Saudi Logistics Services Making Efficient Use Of Its Profits?

SAL Saudi Logistics Services' three-year median payout ratio is a pretty moderate 33%, meaning the company retains 67% of its income. By the looks of it, the dividend is well covered and SAL Saudi Logistics Services is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Our latest analyst data shows that the future payout ratio of the company is expected to rise to 56% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

On the whole, we feel that SAL Saudi Logistics Services' performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com