Basic Chemical Industries Company (TADAWUL: 1210) Stocks Strengthen But Fundamentals Look Uncertain: What’s Next?

Basic Chemical Industries (TADAWUL: 1210) has seen strong growth in the equity market with stock rising 14% in the past three months. However, we have decided to pay attention to the fundamentals of the company which do not seem to give a clear sign on the financial health of the company. Specifically, we decided to study the ROE of basic chemical industries 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 has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by shareholders to the company.

Check out our latest analysis for basic chemical industries

How do you calculate return on equity?

ROE can be calculated using the formula:

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

So, based on the above formula, the ROE for basic chemical industries is:

9.4% = ر.س 58 m ÷ ر.س 623 m (Based on the last twelve months up to December 2020).

The “return” is the annual profit. One way to conceptualize this is that for every SAR1 of shareholder capital it has, the company made a profit of 0.09 SAR.

Why is ROE important for profit growth?

We have already established that ROE serves as an effective gauge to generate profit for the future profits of a business. We now need to assess how much profit the business is reinvesting or “withholding” for future growth, which then gives us an idea of ​​the growth potential of the business. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate compared to companies that do not. the same characteristics.

9.4% profit growth and ROE for basic chemical industries

As you can see, Basic Chemical Industries’ ROE seems quite low. However, the fact that it is above the industry average of 6.8% is 100 makes us a little more interested. That said, Basic Chemical Industries’ net income growth over the past five years is more or less stable. Remember, the company’s ROE is pretty low initially, just above the industry average. So that’s what could keep earnings growth weak.

Next, we compared the performance of Basic Chemical Industries to that of the industry and found that the industry had reduced its profits to 3.9% during the same period, which suggests that the company’s profits have declined at a slower pace than its industry, while it’s not particularly good, it’s not particularly bad either.

SASE: 1210 Past profit growth May 21, 2021

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. If you are wondering about the valuation of Basic Chemical Industries, check out this indicator of its price / earnings ratio, relative to its industry.

Are basic chemical industries making efficient use of its retained earnings?

With a high three-year median payout rate of 60% (implying that the company only keeps 40% of its revenue) of its business to be reinvested in its business), most of Basic Chemical Industries’ profits are returned to shareholders, which explains the lack of earnings growth.

Additionally, Basic Chemical Industries has been paying dividends for eight years, which is a considerable amount of time, suggesting that management must have perceived that shareholders prefer dividends over earnings growth.

summary

Overall, we have mixed feelings about the basic chemical industries. On the one hand, the company has a decent rate of return, however, its earnings growth figure is quite disappointing, and as previously noted, low retained earnings are hampering growth. So far, we’ve only done a brief review of the company’s growth data. For more information on Basic Chemical Industries’ past earnings growth, check out this visualization of past earnings, revenue, and cash flow.

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About Geraldine Higgins

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