It is hard to get excited after looking at Saudi Arabian Oil’s (TADAWUL:2222) recent performance, when its stock has declined 4.6% over the past month. However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Saudi Arabian Oil’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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Do You 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 Saudi Arabian Oil is:
24% = ر.س394b ÷ ر.س1.7t (Based on the trailing twelve months to March 2025).
The ‘return’ is the yearly profit. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.24 in profit.
View our latest analysis for Saudi Arabian Oil
What Has ROE Got To Do With Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
A Side By Side comparison of Saudi Arabian Oil’s Earnings Growth And 24% ROE
At first glance, Saudi Arabian Oil seems to have a decent ROE. Especially when compared to the industry average of 10% the company’s ROE looks pretty impressive. Probably as a result of this, Saudi Arabian Oil was able to see a decent growth of 12% over the last five years.
As a next step, we compared Saudi Arabian Oil’s net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 15% in the same period.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. Has the market priced in the future outlook for 2222? You can find out in our latest intrinsic value infographic research report.
Is Saudi Arabian Oil Making Efficient Use Of Its Profits?
Saudi Arabian Oil has a significant three-year median payout ratio of 76%, meaning that it is left with only 24% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.
Additionally, Saudi Arabian Oil has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 85% of its profits over the next three years. Therefore, the company’s future ROE is also not expected to change by much with analysts predicting an ROE of 25%.
Conclusion
In total, it does look like Saudi Arabian Oil has some positive aspects to its business. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
