Is Weakness In Emaar Development PJSC (DFM:EMAARDEV) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 4.5% over the past month, it is easy to disregard Emaar Development PJSC (DFM:EMAARDEV). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Emaar Development 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Emaar Development PJSC

How To Calculate Return On Equity?

ROE 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 Emaar Development PJSC is:

29% = د.إ3.5b ÷ د.إ12b (Based on the trailing twelve months to December 2019).

The 'return' is the yearly profit. So, this means that for every AED1 of its shareholder's investments, the company generates a profit of AED0.29.

What Has ROE Got To Do With Earnings Growth?

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.

Emaar Development PJSC's Earnings Growth And 29% ROE

To begin with, Emaar Development PJSC seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 7.2%. This certainly adds some context to Emaar Development PJSC's decent 16% net income growth seen over the past five years.

As a next step, we compared Emaar Development PJSC's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.4%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Emaar Development PJSC fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Emaar Development PJSC Efficiently Re-investing Its Profits?

Emaar Development PJSC has a three-year median payout ratio of 32%, which implies that it retains the remaining 68% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 50% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 19%, over the same period.

Conclusion

Overall, we are quite pleased with Emaar Development PJSC's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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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