Decline in stocks and strong fundamentals: Is the market wrong on the company of the medical services group of Dr. Sulaiman Al Habib (TADAWUL: 4013)?
It’s hard to get excited after seeing the recent performance of Dr. Sulaiman Al Habib Medical Services Group (TADAWUL:4013), as its stock is down 10% in the past month. However, a closer look at his healthy finances might make you think again. Since fundamentals generally determine long-term market outcomes, the company is worth looking into. In particular, we will pay attention today to the ROE of Dr. Sulaiman Al Habib Medical Services Group.
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.
See our latest analysis for Dr. Sulaiman Al Habib Medical Services Group
How to calculate return on equity?
The ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Dr. Sulaiman Al Habib Medical Services Group is:
26% = ر.س1.5b ÷ ر.س5.7b (Based on the last twelve months to March 2022).
The “yield” is the profit of the last twelve months. Another way to think about this is that for every 1 SAR worth of equity, the company was able to make a profit of 0.26 SAR.
What does ROE have to do with earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Dr. Sulaiman Al Habib Medical Services Group profit growth and ROE of 26%
For starters, the ROE of Dr. Sulaiman Al Habib Medical Services Group seems acceptable. Especially when compared to the industry average of 14%, the company’s ROE looks pretty impressive. This likely laid the foundation for Dr. Sulaiman Al Habib Medical Services Group’s moderate 19% net income growth seen over the past five years.
In a next step, we compared the growth of net income of Dr. Sulaiman Al Habib Medical Services Group with the industry, and fortunately, we found that the growth observed by the company is higher than the average growth of the industry 7.5%.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. 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. Is Dr. Sulaiman Al Habib Medical Services Group correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Is Dr. Sulaiman Al Habib’s Medical Services Group Effectively Using Its Retained Earnings?
The high three-year median payout rate of 71% (or a retention rate of 29%) for Dr. Sulaiman Al Habib Medical Services Group suggests that the company’s growth has not been significantly hampered despite the return of most of its income to its shareholders.
In addition to seeing profit growth, Dr. Sulaiman Al Habib Medical Services Group has only recently started paying dividends. It is quite possible that the company was trying to impress its shareholders. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out approximately 64% of its earnings over the next three years. As a result, the company’s future ROE is also not expected to change much, with analysts predicting an ROE of 29%.
Overall, we believe that the performance of Dr. Sulaiman Al Habib Medical Services Group has been quite good. In particular, its high ROE is quite remarkable and also the probable explanation for its considerable earnings growth. Yet the company retains a small portion of its profits. Which means the company was able to increase its profits despite this, so it’s not that bad. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization 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.