Does Gulf Medical Projects Company (PJSC)'s (ADX:GMPC) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Gulf Medical Projects Company (PJSC)'s (ADX:GMPC) stock is up by a considerable 87% over the past three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Specifically, we decided to study Gulf Medical Projects Company (PJSC)'s ROE in this article.

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.

See our latest analysis for Gulf Medical Projects Company (PJSC)

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Gulf Medical Projects Company (PJSC) is:

7.1% = د.إ73m ÷ د.إ1.0b (Based on the trailing twelve months to March 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every AED1 of its shareholder's investments, the company generates a profit of AED0.07.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Gulf Medical Projects Company (PJSC)'s Earnings Growth And 7.1% ROE

As you can see, Gulf Medical Projects Company (PJSC)'s ROE looks pretty weak. Even compared to the average industry ROE of 9.3%, the company's ROE is quite dismal. For this reason, Gulf Medical Projects Company (PJSC)'s five year net income decline of 8.9% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.

However, when we compared Gulf Medical Projects Company (PJSC)'s growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 8.8% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. One 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 prospects. So, you may want to check if Gulf Medical Projects Company (PJSC) is trading on a high P/E or a low P/E, relative to its industry.

Is Gulf Medical Projects Company (PJSC) Making Efficient Use Of Its Profits?

Gulf Medical Projects Company (PJSC)'s declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 64% (or a retention ratio of 36%). With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. You can see the 3 risks we have identified for Gulf Medical Projects Company (PJSC) by visiting our risks dashboard for free on our platform here.

Additionally, Gulf Medical Projects Company (PJSC) has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

Overall, we would be extremely cautious before making any decision on Gulf Medical Projects Company (PJSC). As a result of its low ROE and lack of mich reinvestment into the business, the company has seen a disappointing earnings growth rate. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Gulf Medical Projects Company (PJSC)'s past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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This article by Simply Wall St is general in nature. 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.
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