National Gas & Industerialization Co. (TADAWUL:2080) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

National Gas & Industerialization (TADAWUL:2080) has had a great run on the share market with its stock up by a significant 23% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on National Gas & Industerialization's ROE.

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.

View our latest analysis for National Gas & Industerialization

How Is ROE Calculated?

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 National Gas & Industerialization is:

12% = ر.س207m ÷ ر.س1.7b (Based on the trailing twelve months to March 2021).

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 SAR0.12 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 & Industerialization's Earnings Growth And 12% ROE

When you first look at it, National Gas & Industerialization's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 9.1%, is definitely interesting. But then again, seeing that National Gas & Industerialization's net income shrunk at a rate of 9.9% in the past five years, makes us think again. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the decline in earnings could also be the result of this.

So, as a next step, we compared National Gas & Industerialization's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 6.8% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is National Gas & Industerialization fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is National Gas & Industerialization Efficiently Re-investing Its Profits?

National Gas & Industerialization's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 63% (or a retention ratio of 37%). The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run.

In addition, National Gas & Industerialization has been paying dividends over a period of eight years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

Overall, we have mixed feelings about National Gas & Industerialization. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of National Gas & Industerialization's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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This article by Simply Wall St is general in nature. 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.
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