Can Mixed Fundamentals Have A Negative Impact on Saudi Parts Center Company (TADAWUL:9533) Current Share Price Momentum?

Simply Wall St · 10/17 03:02

Saudi Parts Center's (TADAWUL:9533) stock is up by a considerable 22% over the past month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Saudi Parts Center'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 Saudi Parts Center

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Saudi Parts Center is:

8.7% = ر.س4.1m ÷ ر.س47m (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every SAR1 worth of shareholders' equity, the company generated SAR0.09 in profit.

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.

Saudi Parts Center's Earnings Growth And 8.7% ROE

It is hard to argue that Saudi Parts Center's ROE is much good in and of itself. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 9.1%. Therefore, it might not be wrong to say that the five year net income decline of 7.0% seen by Saudi Parts Center was possibly a result of the disappointing ROE.

So, as a next step, we compared Saudi Parts Center's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 5.1% over the last few years.

past-earnings-growth
SASE:9533 Past Earnings Growth October 17th 2024

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Saudi Parts Center's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Saudi Parts Center Making Efficient Use Of Its Profits?

Saudi Parts Center doesn't pay any regular dividends, meaning that potentially all of its profits are being reinvested in the business, which doesn't explain why the company's earnings have shrunk if it is retaining all of its profits. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Conclusion

On the whole, we feel that the performance shown by Saudi Parts Center can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 3 risks we have identified for Saudi Parts Center visit our risks dashboard for free.