Will Weakness in Etihad Atheeb Telecommunication Company’s (TADAWUL:7040) Stock Prove Temporary Given Strong Fundamentals?

Etihad Atheeb Telecommunication (TADAWUL:7040) has had a rough month with its share price down 21%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Etihad Atheeb Telecommunication’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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

Check out our latest analysis for Etihad Atheeb Telecommunication

How To 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 Etihad Atheeb Telecommunication is:

70% = ر.س206m ÷ ر.س293m (Based on the trailing twelve months to December 2023).

The ‘return’ is the yearly profit. So, this means that for every SAR1 of its shareholder’s investments, the company generates a profit of SAR0.70.

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. 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.

Etihad Atheeb Telecommunication’s Earnings Growth And 70% ROE

To begin with, Etihad Atheeb Telecommunication has a pretty high ROE which is interesting. Additionally, the company’s ROE is higher compared to the industry average of 12% which is quite remarkable. Under the circumstances, Etihad Atheeb Telecommunication’s considerable five year net income growth of 53% was to be expected.

As a next step, we compared Etihad Atheeb Telecommunication’s 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 14%.

Earnings growth is a huge factor in stock valuation. 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. If you’re wondering about Etihad Atheeb Telecommunication’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Etihad Atheeb Telecommunication Using Its Retained Earnings Effectively?

Etihad Atheeb Telecommunication doesn’t pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

Overall, we are quite pleased with Etihad Atheeb Telecommunication’s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let’s not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 3 risks we have identified for Etihad Atheeb Telecommunication visit our risks dashboard for free.

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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.