Stock Analysis
Saudi Aramco Base Oil Company – Luberef (TADAWUL:2223) has had a great run on the share market with its stock up by a significant 23% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Saudi Aramco Base Oil Company – Luberef's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Saudi Aramco Base Oil Company – Luberef
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 Aramco Base Oil Company – Luberef is:
38% = ر.س2.1b ÷ ر.س5.5b (Based on the trailing twelve months to March 2023).
The 'return' refers to a company's earnings over the last year. So, this means that for every SAR1 of its shareholder's investments, the company generates a profit of SAR0.38.
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.
Firstly, we acknowledge that Saudi Aramco Base Oil Company – Luberef has a significantly high ROE. Secondly, even when compared to the industry average of 7.3% the company's ROE is quite impressive. As a result, Saudi Aramco Base Oil Company – Luberef's exceptional 48% net income growth seen over the past five years, doesn't come as a surprise.
We then compared Saudi Aramco Base Oil Company – Luberef's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 35% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 2223? You can find out in our latest intrinsic value infographic research report.
Saudi Aramco Base Oil Company – Luberef's three-year median payout ratio is a pretty moderate 41%, meaning the company retains 59% of its income. So it seems that Saudi Aramco Base Oil Company – Luberef is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 87% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 22%) over the same period.
Overall, we are quite pleased with Saudi Aramco Base Oil Company – Luberef's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
Find out whether Saudi Aramco Base Oil Company – Luberef is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
Saudi Aramco Base Oil Company – Luberef produces and sells base oils and various by-products in the Kingdom of Saudi Arabia and internationally.
Solid track record with excellent balance sheet.
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