Al-Jouf Agricultural Development's (TADAWUL:6070) stock is up by a considerable 25% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Al-Jouf Agricultural Development's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Al-Jouf Agricultural Development

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Al-Jouf Agricultural Development is:

7.8% = ر.س55m ÷ ر.س698m (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. That means that for every SAR1 worth of shareholders' equity, the company generated SAR0.08 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Al-Jouf Agricultural Development's Earnings Growth And 7.8% ROE

It is quite clear that Al-Jouf Agricultural Development's ROE is rather low. Even compared to the average industry ROE of 12%, the company's ROE is quite dismal. In spite of this, Al-Jouf Agricultural Development was able to grow its net income considerably, at a rate of 21% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Al-Jouf Agricultural Development's growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Al-Jouf Agricultural Development fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Al-Jouf Agricultural Development Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 59% (implying that it keeps only 41% of profits) for Al-Jouf Agricultural Development suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Additionally, Al-Jouf Agricultural Development has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we do feel that Al-Jouf Agricultural Development has some positive attributes. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Al-Jouf Agricultural Development's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.