Agthia Group PJSC's (ADX:AGTHIA) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

It is hard to get excited after looking at Agthia Group PJSC's (ADX:AGTHIA) recent performance, when its stock has declined 17% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Agthia Group PJSC's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Agthia Group PJSC

How To 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 Agthia Group PJSC is:

12% = د.إ349m ÷ د.إ2.9b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each AED1 of shareholders' capital it has, the company made AED0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Agthia Group PJSC's Earnings Growth And 12% ROE

It is quite clear that Agthia Group PJSC's ROE is rather low. Still, the company's ROE is higher than the average industry ROE of 9.3% so that's certainly interesting. Especially when you consider Agthia Group PJSC's exceptional 26% 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. Hence, there might be some other aspects that are causing earnings to grow. For instance, the company has a low payout ratio or is being managed efficiently

Next, on comparing with the industry net income growth, we found that Agthia Group PJSC'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. What is AGTHIA worth today? The intrinsic value infographic in our free research report helps visualize whether AGTHIA is currently mispriced by the market.

Is Agthia Group PJSC Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 52% (implying that it keeps only 48% of profits) for Agthia Group PJSC suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Additionally, Agthia Group PJSC has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 41% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

Summary

On the whole, we do feel that Agthia Group PJSC has some positive attributes. Namely, its significant earnings growth, to which its moderate rate of return likely contributed. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.