Dubai Refreshment (P.J.S.C.)'s (DFM:DRC) Stock Is Going Strong: Is the Market Following Fundamentals?

Dubai Refreshment (P.J.S.C.)'s (DFM:DRC) stock is up by a considerable 16% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Dubai Refreshment (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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Dubai Refreshment (P.J.S.C.)

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Dubai Refreshment (P.J.S.C.) is:

37% = د.إ361m ÷ د.إ989m (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each AED1 of shareholders' capital it has, the company made AED0.37 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Dubai Refreshment (P.J.S.C.)'s Earnings Growth And 37% ROE

First thing first, we like that Dubai Refreshment (P.J.S.C.) has an impressive ROE. Secondly, even when compared to the industry average of 9.1% the company's ROE is quite impressive. Under the circumstances, Dubai Refreshment (P.J.S.C.)'s considerable five year net income growth of 45% was to be expected.

As a next step, we compared Dubai Refreshment (P.J.S.C.)'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 12%.

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. 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 Dubai Refreshment (P.J.S.C.) is trading on a high P/E or a low P/E, relative to its industry.

Is Dubai Refreshment (P.J.S.C.) Making Efficient Use Of Its Profits?

Dubai Refreshment (P.J.S.C.) has a significant three-year median payout ratio of 62%, meaning the company only retains 38% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Moreover, Dubai Refreshment (P.J.S.C.) is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

In total, we are pretty happy with Dubai Refreshment (P.J.S.C.)'s performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Up till now, we've only made a short study of the company's growth data. To gain further insights into Dubai Refreshment (P.J.S.C.)'s past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.