Is Fesh Fash Snack Food Production Company's (TADAWUL:9515) Stock Price Struggling As A Result Of Its Mixed Financials?

Simply Wall St · 10/17 03:05

Fesh Fash Snack Food Production (TADAWUL:9515) has had a rough three months with its share price down 20%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Specifically, we decided to study Fesh Fash Snack Food Production'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 Fesh Fash Snack Food Production

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 Fesh Fash Snack Food Production is:

22% = ر.س3.2m ÷ ر.س15m (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each SAR1 of shareholders' capital it has, the company made SAR0.22 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Fesh Fash Snack Food Production's Earnings Growth And 22% ROE

On the face of it, Fesh Fash Snack Food Production's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 18%, is definitely interesting. However, Fesh Fash Snack Food Production's five year net income decline rate was 21%. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Therefore, the decline in earnings could also be the result of this.

However, when we compared Fesh Fash Snack Food Production's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 16% in the same period. This is quite worrisome.

past-earnings-growth
SASE:9515 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). This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Fesh Fash Snack Food Production is trading on a high P/E or a low P/E, relative to its industry.

Is Fesh Fash Snack Food Production Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 81% (implying that 19% of the profits are retained), most of Fesh Fash Snack Food Production's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. Our risks dashboard should have the 3 risks we have identified for Fesh Fash Snack Food Production.

In addition, Fesh Fash Snack Food Production only recently started paying a dividend so the management probably decided the shareholders prefer dividends even though earnings have been shrinking.

Conclusion

In total, we're a bit ambivalent about Fesh Fash Snack Food Production's performance. Primarily, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE. Bear in mind, the company reinvests a small portion of its profits, which explains the lack of growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Fesh Fash Snack Food Production's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.