Will Weakness in SAL Saudi Logistics Services Company's (TADAWUL:4263) Stock Prove Temporary Given Strong Fundamentals?

With its stock down 34% over the past three months, it is easy to disregard SAL Saudi Logistics Services (TADAWUL:4263). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study SAL Saudi Logistics Services' ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for SAL Saudi Logistics Services is:

47% = ر.س661m ÷ ر.س1.4b (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every SAR1 worth of shareholders' equity, the company generated SAR0.47 in profit.

See our latest analysis for SAL Saudi Logistics Services

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of SAL Saudi Logistics Services' Earnings Growth And 47% ROE

Firstly, we acknowledge that SAL Saudi Logistics Services has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 8.2% also doesn't go unnoticed by us. Under the circumstances, SAL Saudi Logistics Services' considerable five year net income growth of 28% was to be expected.

We then compared SAL Saudi Logistics Services' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 7.5% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if SAL Saudi Logistics Services is trading on a high P/E or a low P/E, relative to its industry.

Is SAL Saudi Logistics Services Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 57% (implying that it keeps only 43% of profits) for SAL Saudi Logistics Services suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

While SAL Saudi Logistics Services has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 80% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Summary

In total, we are pretty happy with SAL Saudi Logistics 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.