Are Alpha Dhabi Holding PJSC's (ADX:ALPHADHABI) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

It is hard to get excited after looking at Alpha Dhabi Holding PJSC's (ADX:ALPHADHABI) recent performance, when its stock has declined 8.4% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Alpha Dhabi Holding 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Alpha Dhabi Holding PJSC

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Alpha Dhabi Holding PJSC is:

18% = د.إ13b ÷ د.إ74b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. That means that for every AED1 worth of shareholders' equity, the company generated AED0.18 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Alpha Dhabi Holding PJSC's Earnings Growth And 18% ROE

When you first look at it, Alpha Dhabi Holding PJSC's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 18%. Looking at Alpha Dhabi Holding PJSC's exceptional 50% five-year net income growth in particular, we are definitely impressed. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then performed a comparison between Alpha Dhabi Holding PJSC's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 50% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Alpha Dhabi Holding PJSC is trading on a high P/E or a low P/E, relative to its industry.

Is Alpha Dhabi Holding PJSC Using Its Retained Earnings Effectively?

Given that Alpha Dhabi Holding PJSC doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

On the whole, we do feel that Alpha Dhabi Holding PJSC has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard will have the 1 risk we have identified for Alpha Dhabi Holding PJSC.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.