Is The Power and Water Utility Company for Jubail and Yanbu's (TADAWUL:2083) Stock Price Struggling As A Result Of Its Mixed Financials?

With its stock down 15% over the past three months, it is easy to disregard Power and Water Utility Company for Jubail and Yanbu (TADAWUL:2083). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on Power and Water Utility Company for Jubail and Yanbu'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Power and Water Utility Company for Jubail and Yanbu

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Power and Water Utility Company for Jubail and Yanbu is:

5.8% = ر.س462m ÷ ر.س8.0b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.06 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 Power and Water Utility Company for Jubail and Yanbu's Earnings Growth And 5.8% ROE

As you can see, Power and Water Utility Company for Jubail and Yanbu's ROE looks pretty weak. Even when compared to the industry average of 9.8%, the ROE figure is pretty disappointing. Although, we can see that Power and Water Utility Company for Jubail and Yanbu saw a modest net income growth of 15% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Power and Water Utility Company for Jubail and Yanbu's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 19% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 2083 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Power and Water Utility Company for Jubail and Yanbu Making Efficient Use Of Its Profits?

Power and Water Utility Company for Jubail and Yanbu has a significant three-year median payout ratio of 86%, meaning that it is left with only 14% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

While Power and Water Utility Company for Jubail and Yanbu has been growing its earnings, it only recently started to pay dividends which likely means 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 is expected to keep paying out approximately 80% of its profits over the next three years. However, Power and Water Utility Company for Jubail and Yanbu's ROE is predicted to rise to 11% despite there being no anticipated change in its payout ratio.

Conclusion

In total, we're a bit ambivalent about Power and Water Utility Company for Jubail and Yanbu's performance. Although the company has shown a fair bit of growth in earnings, the reinvestment rate is low. Meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits and reinvesting that at a higher rate of return. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

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