Etihad Atheeb Telecommunication (TADAWUL:7040) has had a great run on the share market with its stock up by a significant 6.4% over the last month. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Etihad Atheeb Telecommunication’s ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Put another way, it reveals the company’s success at turning shareholder investments into profits.
View our latest analysis for Etihad Atheeb Telecommunication
How Is ROE Calculated?
ROE 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 Etihad Atheeb Telecommunication is:
37% = ر.س93m ÷ ر.س253m (Based on the trailing twelve months to December 2020).
The ‘return’ is the income the business earned over the last year. One way to conceptualize this is that for each SAR1 of shareholders’ capital it has, the company made SAR0.37 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Etihad Atheeb Telecommunication’s Earnings Growth And 37% ROE
First thing first, we like that Etihad Atheeb Telecommunication has an impressive ROE. Additionally, the company’s ROE is higher compared to the industry average of 10% which is quite remarkable. As a result, Etihad Atheeb Telecommunication’s exceptional 30% net income growth seen over the past five years, doesn’t come as a surprise.
Next, on comparing with the industry net income growth, we found that Etihad Atheeb Telecommunication’s growth is quite high when compared to the industry average growth of 5.6% in the same period, which is great to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Etihad Atheeb Telecommunication is trading on a high P/E or a low P/E, relative to its industry.
Is Etihad Atheeb Telecommunication Using Its Retained Earnings Effectively?
Overall, we are quite pleased with Etihad Atheeb Telecommunication’s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let’s not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 1 risk we have identified for Etihad Atheeb Telecommunication visit our risks dashboard for free.
When trading stocks or any other investment, use the platform considered by many to be the Professional’s Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.