Real estate development company Dar Al Arkan (TADAWUL:4300) is doing well but fundamentals look mixed: is there a clear direction for the stock?
Dar Al Arkan Real Estate Development (TADAWUL:4300) shares are up 36% in the past three months. However, we decided to pay attention to the fundamentals of the company which do not seem to give a clear indication of the financial health of the company. In this article, we have decided to focus on the ROE of Dar Al Arkan Real Estate Development.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Our analysis indicates that 4300 is potentially undervalued!
How do you calculate return on equity?
The ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Dar Al Arkan Real Estate Development is:
2.0% = ر.س395m ÷ ر.س19b (Based on past twelve months to June 2022).
The “return” is the annual profit. This means that for every SAR1 of equity, the company has generated 0.02 SAR of profit.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Earnings growth and ROE of 2.0% from Dar Al Arkan Real Estate Development
It is difficult to say that the ROE of Dar Al Arkan Real Estate Development is very good in itself. Even compared to the industry average ROE of 7.1%, the company’s ROE is pretty dismal. Therefore, it may not be wrong to say that the 29% decline in net income over five years seen by Dar Al Arkan Real Estate Development was possibly the result of lower ROE. We believe there could be other factors at play here as well. For example, the company has a very high payout rate or faces competitive pressures.
In a next step, we compared the performance of Dar Al Arkan Real Estate Development with the industry and found that the performance of Dar Al Arkan Real Estate Development is depressing even compared to the industry, which reduced its profits to a rate of 1.7% over the same period. , which is a slower than enterprise.
Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. A 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 outlook. So, you might want to check if Dar Al Arkan Real Estate Development is trading on a high P/E or a low P/E, relative to its industry.
Is Dar Al Arkan’s property development effectively using its profits?
Dar Al Arkan Real Estate Development does not pay any dividends, which means that potentially all of its profits are reinvested in the company, which does not explain why the company’s profits have decreased if it retains all of its profits. It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.
Overall, we believe that the performance displayed by Dar Al Arkan Real Estate Development can be subject to many interpretations. Although the company has a high reinvestment rate, the low ROE means that all this reinvestment does not benefit its investors and, moreover, it has a negative impact on earnings growth. In conclusion, we would proceed with caution with this business and one way to do that would be to review the risk profile of the business. To know the 2 risks that we have identified for Dar Al Arkan Real Estate Development, visit our risk dashboard for free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.