City Cement (TADAWUL:3003) had a difficult month with an 11% drop in its share price. However, the company’s fundamentals look pretty decent and long-term financial data is generally in line with future market price movements. In particular, we will pay attention to the ROE of City Cement today.
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 simple terms, it is used to assess the profitability of a company in relation to its equity.
Check out our latest analysis for City Cement
How is ROE calculated?
The ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for City Cement is:
6.3% = ر.س111m ÷ ر.س1.8b (Based on past twelve months to March 2022).
The “yield” is the amount earned after tax over the last twelve months. This therefore means that for each SAR1 of its shareholder’s investments, the company generates a profit of SAR0.06.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. 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.
City Cement earnings growth and ROE of 6.3%
As you can see, City Cement’s ROE seems quite low. An industry comparison shows that the company’s ROE is also not much different from the industry average of 6.3%. As a result, City Cement’s decent 13% net profit growth over the past five years bodes well for us. Given the low ROE, it is quite possible that other aspects positively influence the company’s earnings growth. Such as – high revenue retention or effective management in place.
Then, comparing City Cement’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 14% over the same period.
Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. What is 3003 worth today? The intrinsic value infographic in our free research report visualizes whether 3003 is currently being mispriced by the market.
Does City Cement effectively reinvest its profits?
While City Cement has a three-year median payout ratio of 83% (meaning it retains 17% of earnings), the company has still seen good earnings growth in the past, meaning that its high payout ratio has not hindered its ability to grow.
Additionally, City Cement has paid dividends over a nine-year period, which means the company is pretty serious about sharing its profits with shareholders.
All in all, it seems that City Cement has positive aspects for its business. While its earnings growth is undoubtedly quite significant, we believe that the reinvestment rate is quite low, which means that the earnings growth figure could have been significantly higher had the company retained a greater part of its profits. That said, the latest analyst forecasts show that the company will continue to see earnings expansion. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.