Weak Financial Prospects Seem To Be Dragging Down Riyadh Cement Company (TADAWUL:9512) Stock

Riyadh Cement (TADAWUL:9512) has had a rough week with its share price down 6.0%. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company’s key financial indicators. Specifically, we decided to study Riyadh Cement’s ROE in this article.

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.

See our latest analysis for Riyadh Cement

How Do You 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 Riyadh Cement is:

13% = ر.س212m ÷ ر.س1.7b (Based on the trailing twelve months to December 2021).

The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each SAR1 of shareholders’ capital it has, the company made SAR0.13 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of Riyadh Cement’s Earnings Growth And 13% ROE

On the face of it, Riyadh Cement’s ROE is not much to talk about. Although a closer study shows that the company’s ROE is higher than the industry average of 5.7% which we definitely can’t overlook. Still, Riyadh Cement’s net income growth of 3.1% over the past five years was mediocre at best. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the low growth in earnings could also be the result of this.

As a next step, we compared Riyadh Cement’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 15% in the same period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for 9512? You can find out in our latest intrinsic value infographic research report.

Is Riyadh Cement Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 96% (or a retention ratio of 4.4%), most of Riyadh Cement’s profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, Riyadh Cement only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Summary

On the whole, Riyadh Cement’s performance is quite a big let-down. While its ROE is pretty moderate, the company is retaining very little of its profits, meaning very little of its profits are being reinvested into the business. This explains the lack or absence of growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page 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.