Should the weakness in Savola Group Company shares (TADAWUL: 2050) be taken as a sign that the market will correct the share price given decent financial data?

The Savola group (TADAWUL: 2050) had a difficult three-month period with a drop in its share price of 8.4%. However, stock prices are usually determined by a company’s long-term financial data, which in this case looks pretty respectable. In this article, we have decided to focus on the ROE of Savola Group.

Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

See our latest analysis for Savola Group

How to calculate return on equity?

ROE can be calculated using the formula:

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

Thus, based on the above formula, the ROE of Savola Group is:

8.8% = ر.س 831 m ÷ ر.س 9.4 b (Based on the last twelve months up to June 2021).

“Return” refers to a company’s profits over the past year. One way to conceptualize this is that for every SAR1 of shareholders’ capital it has, the company made SAR0.09 in profit.

Why is ROE important for profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.

Earnings growth and ROE of 8.8% for the Savola group

It is quite clear that the ROE of Savola Group is rather low. A comparison with the industry shows that the company’s ROE is quite similar to the industry average ROE of 9.9%. As a result, the decent 9.3% net profit growth of the Savola Group observed over the past five years bodes well for us. We believe that there could also be other factors at play that influence the growth of the business. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.

Next, comparing with the industry’s net income growth, we found that the growth figure reported by Savola Group compares quite favorably with the industry average, which shows a 3.5% decline over the course of from the same period.

SASE: 2050 Past profit growth on October 18, 2021

Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. Is the Savola group just valued compared to other companies? These 3 evaluation measures could help you decide.

Is Savola Group Efficiently Using Its Retained Earnings?

The Savola Group has a three-year median payout rate of 34%, which means it keeps the remaining 66% of its profits. This suggests that its dividend is well hedged and, given the decent growth seen by the company, it appears that management is reinvesting its earnings in an efficient manner.

In addition, Savola Group has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with its shareholders. Our latest analyst data shows the company’s future payout ratio is expected to reach 56% over the next three years. Either way, Savola Group’s future ROE is expected to increase to 13% despite the expected increase in payout ratio. There could likely be other factors that could be driving future ROE growth.

Conclusion

All in all, it seems that the Savola group has positive aspects in its activity. Even despite the low rate of return, the company has shown impressive profit growth by reinvesting heavily in its operations. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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About Virginia Ahn

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