With the stock down 14% over the past three months, it’s easy to disregard Saudi Real Estate (TADAWUL:4020). However, the company’s fundamentals look pretty good and long-term financials usually track future market price movements. We’ve decided to specifically examine Saudi Real Estate’s return on equity in this article.

Return on equity (ROE) is a measure of how effectively a company increases its value and manages its investors’ money. In other words, it shows how successful the company is at converting shareholders’ investments into profits.

Check out our latest Saudi real estate analysis

How do you calculate return on equity?

Return on equity can be calculated using the following formula:

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

Based on the above formula, the return on equity for real estate in Saudi Arabia is:

2.6% = AED 129 million ÷ AED 4.9 billion (based on the last twelve months to March 2024).

The “return” is the amount earned after taxes over the last twelve months. You can imagine this as the company making 0.03 SAR in profit for every SAR1 of shareholder capital.

Why is return on equity (ROE) important for earnings growth?

So far, we’ve learned that return on equity is a measure of a company’s profitability. Depending on how much of those profits the company reinvests or “retains” and how effectively it does so, we can judge a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the return on equity and earnings retention, the higher a company’s growth rate will be compared to companies that don’t necessarily have those characteristics.

Earnings growth and return on equity (ROE) at Saudi Real Estate

It is quite clear that Saudi Real Estate’s return on equity is on the low side. Not only that, but even when compared to the industry average of 8.3%, the company’s return on equity is completely unremarkable. However, we were pleasantly surprised to see that Saudi Real Estate managed to grow its net income by a remarkable 58% over the past five years. Therefore, there could be other reasons for this growth. For example, it is possible that the company’s management has made some good strategic decisions or that the company has a low payout ratio.

In the next step, we compared Saudi Real Estate’s net profit growth with that of the industry. We were pleased to see that the company’s growth is higher than the average industry growth of 16%.

The basis for valuing a company depends largely on its earnings growth. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This will help them determine whether the stock’s future looks promising or bleak. Is Saudi Real Estate fairly valued compared to other companies? These 3 valuation metrics could help you decide.

Does the Saudi real estate sector use its retained earnings effectively?

Saudi Real Estate does not currently pay regular dividends, which essentially means that it has reinvested all of its profits into the business. This definitely contributes to the high earnings growth we discussed above.

Summary

Overall, we believe that Saudi Real Estate does have some positive factors to consider. With a high reinvestment rate, albeit with a low return on equity, the company has been able to grow its earnings significantly. However, when looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. You can find more information on the company’s future earnings growth forecasts here. free Read the company’s analyst forecasts report to learn more.

Do you have feedback on this article? Are you concerned about the content? Contact us directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.

This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.