Emirates Integrated Telecommunications Company PJSC's (DFM:DU) Stock Financial Prospects Look Bleak: Should Shareholders Be Prepared For A Share Price Correction?

Emirates Integrated Telecommunications Company PJSC's (DFM:DU) stock up by 2.8% over the past month. However, in this article, we decided to focus on its weak financials, as long-term fundamentals ultimately dictate market outcomes. In this article, we decided to focus on Emirates Integrated Telecommunications Company PJSC's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Emirates Integrated Telecommunications Company PJSC

How To 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 Emirates Integrated Telecommunications Company PJSC is:

17% = د.إ1.4b ÷ د.إ8.3b (Based on the trailing twelve months to June 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 AED0.17.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Emirates Integrated Telecommunications Company PJSC's Earnings Growth And 17% ROE

When you first look at it, Emirates Integrated Telecommunications Company PJSC's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 9.2% which we definitely can't overlook. But seeing Emirates Integrated Telecommunications Company PJSC's five year net income decline of 4.2% over the past five years, we might rethink that. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the shrinking earnings.

That being said, we compared Emirates Integrated Telecommunications Company PJSC's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 8.3% in the same period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is DU worth today? The intrinsic value infographic in our free research report helps visualize whether DU is currently mispriced by the market.

Is Emirates Integrated Telecommunications Company PJSC Using Its Retained Earnings Effectively?

Emirates Integrated Telecommunications 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 93% (or a retention ratio of 6.9%). With only very little left to reinvest into the business, growth in earnings is far from likely.

Moreover, Emirates Integrated Telecommunications Company PJSC has been paying dividends for nine years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 88% of its profits over the next three years. However, Emirates Integrated Telecommunications Company PJSC's ROE is predicted to rise to 20% despite there being no anticipated change in its payout ratio.

Summary

Overall, we would be extremely cautious before making any decision on Emirates Integrated Telecommunications Company PJSC. The company has shown a disappointing growth in its earnings as a result of it retaining little to almost none of its profits. So, the decent ROE it does have, is not much useful to investors given that the company is reinvesting very little into its business. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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