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It’s hard to get excited after seeing Maharah for Human Resources (TADAWUL:1831)’s recent results, with the company’s shares down 14% in the past month. However, the company’s fundamentals look pretty good, and its long-term financials are generally in line with future market price movements. Today we pay special attention to Maharah for Human Resources’ ROE.
ROE, or return on equity, is a useful tool for evaluating how effectively a company generates returns on the investment it receives from shareholders. In other words, it reveals the company’s success in converting shareholder investments into profits.
See our latest analysis for Maharah Human Resources
How to calculate return on equity?
Return on equity can be calculated using the following formula:
Return on equity = Net profit (from continuing operations) ÷ Shareholders’ equity
Therefore, based on the above formula, the ROE of Maharah Human Resources is:
22% = ¤139m ÷ ¤619m (based on the trailing 12 months to September 2023).
The “return” is the profit over the last twelve months. Another way to think of it is that for every SAR1 worth of equity held, the company earned SAR0.22 in profit.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE is a measure of a company’s profitability. Depending on how much of its profits a company chooses to reinvest or “retain”, we are then able to evaluate a company’s ability to generate profits in the future. Assuming everything else remains constant, the higher the ROE and profit retention, the higher the company’s growth rate compared to companies that don’t necessarily share these characteristics.
Maharah HR Profitable Growth and 22% ROE
At first glance, Maharah for Human Resources appears to have a decent ROE. The company’s ROE looks pretty good compared to the industry average ROE of 12%. As a result, Maharah for Human Resources’ five-year net profit fell 13%, which begs the question why the high ROE didn’t translate into earnings growth. We think there may be some other factors holding the company back. For example, a company pays out a significant portion of its earnings as dividends or faces competitive pressures.
However, when we compare Maharah for Human Resources’ growth to the industry, we find that while the company’s profits have been shrinking, the industry’s profits have grown 12% over the same period. This is quite worrying.
Earnings growth is an important factor in stock valuation. Investors should try to determine whether expected earnings growth or decline (in either case) is priced in. This helps them determine whether the stock’s future is bright or bleak. If you’d like to know Maharah for Human Resources’s valuation, check out the Price to Earnings ratio metric compared to its industry.
Does Maharah for Human Resources use its profits effectively?
Maharah for Human Resources has a high three-year median payout ratio of 90% (i.e. it retains 10% of profits). This suggests that the company pays out most of its profits to shareholders as dividends. This partly explains why its earnings have been shrinking. With very little capital left to reinvest in the business, the potential for profitable growth is slim. Our risk dashboard should contain the 4 risks we identified for Maharah for Human Resources.
Additionally, Maharah for Human Resources has paid a dividend over four years, suggesting management prefers to maintain dividend payments even though earnings have been declining.
in conclusion
Overall, we do think HR Mahala has some positive attributes. Still, we’re disappointed with the lack of earnings growth despite high ROE. Keep in mind that the company reinvests a small portion of its profits, meaning investors don’t get the benefit of a high rate of return. Having said that, looking at current analyst forecasts, we see that the company’s earnings growth rate is poised to improve dramatically.To learn more about the company’s future earnings growth forecasts, check out this free Find out more in analyst reports on the company’s forecasts.
Valuation is complex, but we’re helping to make it simple.
Find out if HR Maharah is potentially overvalued or undervalued by checking out our comprehensive analysis, which includes Fair value estimates, risks and warnings, dividends, insider trading and financial health.
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This article from Simply Wall St is general in nature. We only use unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended to provide 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. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative information. Simply Wall St does not hold a position in any of the stocks mentioned.
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