The fundamentals of the Saudi Arabian mobile telecommunications company (TADAWUL: 7030) look quite solid: could the market be wrong about the stock?

It’s hard to get excited after looking at the recent performance of Mobile Telecommunications Company Saudi Arabia (TADAWUL:7030), as its stock is down 16% in the past three months. However, stock prices are usually determined by a company’s long-term finances, which in this case seem quite respectable. In particular, we will pay attention today to the ROE of Mobile Telecommunications Company Saudi Arabia.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simple terms, it is used to assess the profitability of a company in relation to its equity.

See our latest review for Mobile Telecommunications Company Saudi Arabia

How do you calculate return on equity?

The ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

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

2.7% = ر.س254m ÷ ر.س9.2b (Based on past twelve months to March 2022).

The “return” is the annual profit. This therefore means that for each SAR1 of its shareholder’s investments, the company generates a profit of SAR0.03.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Profit growth and ROE of 2.7% of the mobile telecommunications company in Saudi Arabia

It is difficult to say that the ROE of Mobile Telecommunications Company Saudi Arabia is very good on its own. Even compared to the industry average ROE of 11%, the company’s ROE is pretty dismal. Despite this, surprisingly, Mobile Telecommunications Company Saudi Arabia has recorded an exceptional growth of 37% in net profit over the past five years. Therefore, there could be other reasons behind this growth. Such as – high revenue retention or effective management in place.

Then, comparing with the growth of the sector’s net income, we found that the growth of Mobile Telecommunications Company Saudi Arabia is quite high compared to the sector’s average growth of 7.7% over the same period, which is great to see.

SASE: 7030 Past Earnings Growth July 20, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. Is Mobile Telecommunications Company Saudi Arabia valued fairly compared to other companies? These 3 assessment metrics might help you decide.

Is Saudi Arabia’s mobile telecommunications company effectively reinvesting profits?

Mobile Telecommunications Company Saudi Arabia does not pay any dividends to its shareholders, which means that the company has reinvested all of its profits back into the business. This is probably what explains the strong earnings growth discussed above.

Conclusion

All in all, we think Mobile Telecommunications Company Saudi Arabia certainly has some positive factors to consider. With a high reinvestment rate, albeit at a low ROE, the company managed to see considerable growth in earnings. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Sean B. Jackson