Most readers will already know that Saudi Telecom (TADAWUL:7010) stock rose a significant 6.5% over the past week. However, we wonder if the company’s inconsistent financial statements would negatively impact the current share price dynamics. Specifically, we decided to study Saudi Telecom’s ROE in this article.
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 other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Check out our latest analysis for Saudi Telecom
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Saudi Telecom is:
16% = ر.س12b ÷ ر.س71b (Based on the last twelve months to December 2021).
The “yield” is the amount earned after tax over the last twelve months. This means that for every SAR1 of equity, the company generated 0.16 SAR of profit.
What does ROE have to do with earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
Saudi Telecom profit growth and 16% ROE
At first glance, Saudi Telecom’s ROE is not much to tell. Although further study shows that the company’s ROE is above the industry average of 10%, which we certainly cannot ignore. Yet Saudi Telecom’s net income growth of 4.1% over the past five years was mediocre at best. Keep in mind that the company has a low ROE. It’s just that the industry’s ROE is lower. So that could be one of the factors keeping earnings growth weak.
Then, comparing with the sector’s net income growth, we found that Saudi Telecom’s reported growth was lower than the sector’s growth of 11% over the same period, which we don’t like to see.
Earnings growth is an important factor in stock valuation. 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 then helps them determine if the stock is positioned for a bright or bleak future. What is 7010 worth today? The intrinsic value infographic in our free research report helps visualize whether the 7010 is currently being mispriced by the market.
Is Saudi Telecom effectively reinvesting its profits?
Saudi Telecom has a three-year median payout ratio of 73% (implying that it only retains 27% of its profits), which means that it pays out most of its profits to shareholders in the form of dividends and , as a result, the company experienced weak earnings growth.
Moreover, Saudi Telecom has been paying dividends for at least a decade, suggesting that management must have perceived that shareholders preferred dividends to earnings growth. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to remain stable at 66%. As a result, forecasts suggest Saudi Telecom’s future ROE will be 18%, which is again similar to the current ROE.
Overall, we believe that the performance displayed by Saudi Telecom is open to many interpretations. We are mainly disappointed to see a lack of earnings growth, even despite a moderate ROE. Remember that the company reinvests a small part of its profits, which explains the lack of growth. That said, the latest forecasts from industry analysts show that the company’s earnings are set to accelerate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
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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.