Mobile Telecommunications Company Saudi Arabia’s (TADAWUL:7030) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Mobile Telecommunications Company Saudi Arabia (TADAWUL:7030) has had a rough three months with its share price down 9.3%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Mobile Telecommunications Company Saudi Arabia’s ROE today.

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 Mobile Telecommunications Company Saudi Arabia

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Mobile Telecommunications Company Saudi Arabia is:

1.8% = ر.س196m ÷ ر.س11b (Based on the trailing twelve months to March 2024).

The ‘return’ is the income the business earned over the last year. That means that for every SAR1 worth of shareholders’ equity, the company generated SAR0.02 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. 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. 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.

Mobile Telecommunications Company Saudi Arabia’s Earnings Growth And 1.8% ROE

It is hard to argue that Mobile Telecommunications Company Saudi Arabia’s ROE is much good in and of itself. Even compared to the average industry ROE of 9.8%, the company’s ROE is quite dismal. However, we we’re pleasantly surprised to see that Mobile Telecommunications Company Saudi Arabia grew its net income at a significant rate of 22% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Mobile Telecommunications Company Saudi Arabia’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 4.7% in the same 5-year 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. Doing so will help them establish if the stock’s future looks promising or ominous. Is 7030 fairly valued? This infographic on the company’s intrinsic value has everything you need to know.

Is Mobile Telecommunications Company Saudi Arabia Using Its Retained Earnings Effectively?

The three-year median payout ratio for Mobile Telecommunications Company Saudi Arabia is 32%, which is moderately low. The company is retaining the remaining 68%. So it seems that Mobile Telecommunications Company Saudi Arabia is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that’s well covered.

While Mobile Telecommunications Company Saudi Arabia 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. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 60% over the next three years. Regardless, the future ROE for Mobile Telecommunications Company Saudi Arabia is speculated to rise to 6.5% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Conclusion

In total, it does look like Mobile Telecommunications Company Saudi Arabia has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. 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 company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.