National Gas and Industrialization Company's (TADAWUL:2080) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

National Gas and Industrialization (TADAWUL:2080) has had a rough month with its share price down 3.9%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on National Gas and Industrialization's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for National Gas and Industrialization

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 National Gas and Industrialization is:

12% = ر.س236m ÷ ر.س1.9b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.12 in profit.

Why Is ROE Important For 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

National Gas and Industrialization's Earnings Growth And 12% ROE

It is hard to argue that National Gas and Industrialization's ROE is much good in and of itself. Still, the company's ROE is higher than the average industry ROE of 9.8% so that's certainly interesting. Especially when you consider National Gas and Industrialization's exceptional 20% net income growth over the past five years. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. Such as high earnings retention or an efficient management in place.

We then compared National Gas and Industrialization's 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 9.3% 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. This then helps them determine if the stock is placed for a bright or bleak future. 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 National Gas and Industrialization is trading on a high P/E or a low P/E, relative to its industry.

Is National Gas and Industrialization Using Its Retained Earnings Effectively?

National Gas and Industrialization has a significant three-year median payout ratio of 63%, meaning the company only retains 37% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Besides, National Gas and Industrialization has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, it does look like National Gas and Industrialization has some positive aspects to its business. Namely, its significant earnings growth, to which its moderate rate of return likely contributed. 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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on National Gas and Industrialization and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.