Weak Financial Prospects Seem To Be Dragging Down The Power and Water Utility Company for Jubail and Yanbu (TADAWUL:2083) Stock

Power and Water Utility Company for Jubail and Yanbu (TADAWUL:2083) has had a rough three months with its share price down 12%. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study Power and Water Utility Company for Jubail and Yanbu's ROE in this article.

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.

View our latest analysis for Power and Water Utility Company for Jubail and Yanbu

How Do You Calculate Return On Equity?

The formula for return on equity 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:

4.5% = ر.س366m ÷ ر.س8.1b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax 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 SAR0.05 in profit.

What Has ROE Got To Do With 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. 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 4.5% ROE

It is quite clear that Power and Water Utility Company for Jubail and Yanbu's ROE is rather low. Not just that, even compared to the industry average of 7.9%, the company's ROE is entirely unremarkable. Although, we can see that Power and Water Utility Company for Jubail and Yanbu saw a modest net income growth of 5.5% 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.

We then compared Power and Water Utility Company for Jubail and Yanbu's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 19% in the same 5-year period, which is a bit concerning.

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 Power and Water Utility Company for Jubail and Yanbu fairly valued compared to other companies? These 3 valuation measures might help you decide.

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

While Power and Water Utility Company for Jubail and Yanbu has a three-year median payout ratio of 96% (which means it retains 3.7% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

While Power and Water Utility Company for Jubail and Yanbu 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 80%. 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

On the whole, Power and Water Utility Company for Jubail and Yanbu's performance is quite a big let-down. Although the company has shown a fair bit of growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Power and Water Utility Company for Jubail and Yanbu'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. 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.