Is Alpha Dhabi Holding PJSC's (ADX:ALPHADHABI) Latest Stock Performance Being Led By Its Strong Fundamentals?

Alpha Dhabi Holding PJSC's (ADX:ALPHADHABI) stock is up by 4.8% over the past week. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Alpha Dhabi Holding PJSC's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Alpha Dhabi Holding 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 Alpha Dhabi Holding PJSC is:

14% = د.إ13b ÷ د.إ93b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every AED1 worth of equity, the company was able to earn AED0.14 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 14% ROE

As you can see, Alpha Dhabi Holding PJSC's ROE looks pretty weak. Still, the company's ROE is higher than the average industry ROE of 11% so that's certainly interesting. Even more so, after seeing Alpha Dhabi Holding PJSC's exceptional 41% net income growth over the past five years. That being said, the company does have a low ROE to begin with, just that its higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. 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.

As a next step, we compared Alpha Dhabi Holding PJSC's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 45% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is ALPHADHABI fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Alpha Dhabi Holding PJSC Using Its Retained Earnings Effectively?

Alpha Dhabi Holding PJSC's three-year median payout ratio is a pretty moderate 28%, meaning the company retains 72% of its income. By the looks of it, the dividend is well covered and Alpha Dhabi Holding PJSC is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 45% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 5.4% over the same period.

Summary

Overall, we are quite pleased with Alpha Dhabi Holding PJSC's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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. 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.