Alkhorayef Water and Power Technologies Company's (TADAWUL:2081) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

With its stock down 13% over the past three months, it is easy to disregard Alkhorayef Water and Power Technologies (TADAWUL:2081). 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. In this article, we decided to focus on Alkhorayef Water and Power Technologies' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Alkhorayef Water and Power Technologies

How Do You Calculate Return On Equity?

Return on equity 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 Alkhorayef Water and Power Technologies is:

29% = ر.س192m ÷ ر.س658m (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. That means that for every SAR1 worth of shareholders' equity, the company generated SAR0.29 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Alkhorayef Water and Power Technologies' Earnings Growth And 29% ROE

At first glance, Alkhorayef Water and Power Technologies seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 8.7%. This certainly adds some context to Alkhorayef Water and Power Technologies' decent 11% net income growth seen over the past five years.

As a next step, we compared Alkhorayef Water and Power Technologies' 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 4.0%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. 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 Alkhorayef Water and Power Technologies is trading on a high P/E or a low P/E, relative to its industry.

Is Alkhorayef Water and Power Technologies Using Its Retained Earnings Effectively?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a regular dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

Overall, we are quite pleased with Alkhorayef Water and Power Technologies' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.