With its stock down 11% over the past three months, it is easy to disregard Sumou Real Estate (TADAWUL: 9511). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Sumou Real Estate’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.
View our latest analysis for Sumou Real Estate
How Is ROE Calculated?
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 Sumou Real Estate is:
18% = ر.س 81 m ÷ ر.س 454 m (Based on the trailing twelve months to December 2021).
The ‘return’ is the income the business earned over the last year. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.18 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 do not share these attributes.
Sumou Real Estate’s Earnings Growth And 18% ROE
At first glance, Sumou Real Estate seems to have a decent ROE. On comparing with the average industry ROE of 7.5% the company’s ROE looks pretty remarkable. This certainly adds some context to Sumou Real Estate’s decent 6.3% net income growth seen over the past five years.
Given that the industry shrunk its earnings at a rate of 18% in the same period, the net income growth of the company is quite impressive.
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. This then helps them determine if the stock is placed for a bright or bleak future. Is Sumou Real Estate fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Sumou Real Estate Efficiently Re-investing Its Profits?
With a three-year median payout ratio of 34% (implying that the company retains 66% of its profits), it seems that Sumou Real Estate is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend thats well covered.
Along with seeing a growth in earnings, Sumou Real Estate only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.
On the whole, we feel that Sumou Real Estate’s performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for Sumou Real Estate.
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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 into account 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.