Should Weakness in Ghitha Holding P.J.S.C's (ADX:GHITHA) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

Ghitha Holding P.J.S.C (ADX:GHITHA) has had a rough three months with its share price down 13%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Ghitha Holding P.J.S.C's ROE.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Ghitha Holding P.J.S.C

How Do You Calculate Return On Equity?

Return on equity 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 Ghitha Holding P.J.S.C is:

1.0% = د.إ43m ÷ د.إ4.4b (Based on the trailing twelve months to December 2023).

The 'return' is the amount earned after tax over the last twelve months. That means that for every AED1 worth of shareholders' equity, the company generated AED0.01 in profit.

What Is The Relationship Between ROE And 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.

Ghitha Holding P.J.S.C's Earnings Growth And 1.0% ROE

As you can see, Ghitha Holding P.J.S.C's ROE looks pretty weak. Even when compared to the industry average of 9.1%, the ROE figure is pretty disappointing. In spite of this, Ghitha Holding P.J.S.C was able to grow its net income considerably, at a rate of 49% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Ghitha Holding P.J.S.C's growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Ghitha Holding P.J.S.C's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Ghitha Holding P.J.S.C Making Efficient Use Of Its Profits?

Given that Ghitha Holding P.J.S.C doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Summary

On the whole, we do feel that Ghitha Holding P.J.S.C has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. 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. To know the 2 risks we have identified for Ghitha Holding P.J.S.C visit our risks dashboard for free.

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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.