Jarir Marketing (TADAWUL:4190) has had a strong run in the equity market with its shares rising a significant 13% over the past three months. Since stock prices are usually aligned with a company’s financial performance over the long term, we decided to take a closer look at its financial indicators to see if they had a role to play in the recent price movement. . In particular, we will pay attention to the ROE of Jarir Marketing today.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
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How do you calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Jarir Marketing is:
57% = ر.س963m ÷ ر.س1.7b (Based on past twelve months to June 2022).
The “return” is the annual profit. This means that for every SAR1 of equity, the company generated 0.57 SAR of profit.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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.
A side-by-side comparison of Jarir Marketing’s profit growth and 57% ROE
First, we recognize that Jarir Marketing has a significantly high ROE. Second, a comparison to the average industry-reported ROE of 8.8% also does not go unnoticed for us. Despite this, Jarir Marketing’s five-year net income growth has been quite weak, averaging only 3.5%. This is interesting because the high returns should mean that the company has the capacity to generate strong growth, but for some reason it has not been able to do so. A few likely reasons why this could happen are that the company might have a high payout ratio or the company has misallocated capital, for example.
We then performed a comparison between Jarir Marketing’s net income growth and that of the industry, which revealed that the company’s growth is similar to the average industry growth of 3.5% over the of the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. What is 4190 worth today? The intrinsic value infographic in our free research report helps visualize whether 4190 is currently being mispriced by the market.
Does Jarir Marketing use its profits effectively?
With a high three-year median payout ratio of 93% (or a retention rate of 6.6%), most of Jarir Marketing’s profits are paid out to shareholders. This certainly contributes to the weak earnings growth the company has seen.
Additionally, Jarir Marketing has paid dividends over a period of at least ten years, which means the company’s management is committed to paying dividends even if it means little or no profit growth. After reviewing the latest consensus data from analysts, we found that the company is expected to continue to pay out approximately 89% of its earnings over the next three years. As a result, Jarir Marketing’s ROE is not expected to change much either, which we infer from analysts’ estimate of 59% for future ROE.
All in all, it seems that Jarir Marketing has positive aspects for its business. As mentioned earlier, its earnings growth has been quite decent and the high ROE is contributing to this growth. Yet the company invests little or almost none of its profits. This could potentially reduce the chances of the company continuing to see the same level of growth in the future. That said, looking at current analyst estimates, we found that the company’s earnings are expected to accelerate. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page 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.
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