Are Abu Dhabi National Hotels Company PJSC's (ADX:ADNH) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

With its stock down 25% over the past three months, it is easy to disregard Abu Dhabi National Hotels Company PJSC (ADX:ADNH). 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 Abu Dhabi National Hotels Company PJSC's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Abu Dhabi National Hotels Company 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 Abu Dhabi National Hotels Company PJSC is:

4.8% = د.إ423m ÷ د.إ8.8b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. So, this means that for every AED1 of its shareholder's investments, the company generates a profit of AED0.05.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Abu Dhabi National Hotels Company PJSC's Earnings Growth And 4.8% ROE

It is quite clear that Abu Dhabi National Hotels Company PJSC's ROE is rather low. Not just that, even compared to the industry average of 9.5%, the company's ROE is entirely unremarkable. However, the moderate 17% net income growth seen by Abu Dhabi National Hotels Company PJSC over the past five years is definitely a positive. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Abu Dhabi National Hotels Company PJSC's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. What is ADNH worth today? The intrinsic value infographic in our free research report helps visualize whether ADNH is currently mispriced by the market.

Is Abu Dhabi National Hotels Company PJSC Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 48% (implying that the company retains 52% of its profits), it seems that Abu Dhabi National Hotels Company PJSC is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, Abu Dhabi National Hotels Company PJSC has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 60% over the next three years. Still, forecasts suggest that Abu Dhabi National Hotels Company PJSC's future ROE will rise to 6.7% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Conclusion

On the whole, we do feel that Abu Dhabi National Hotels Company 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.