Agthia Group PJSC's (ADX:AGTHIA) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Agthia Group PJSC's (ADX:AGTHIA) stock is up by a considerable 40% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Agthia Group PJSC's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out 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:

1.6% = د.إ30m ÷ د.إ1.9b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every AED1 worth of equity, the company was able to earn AED0.02 in profit.

Why Is ROE Important For 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 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 1.6% ROE

It is quite clear that Agthia Group PJSC's ROE is rather low. Not just that, even compared to the industry average of 9.2%, the company's ROE is entirely unremarkable. For this reason, Agthia Group PJSC's five year net income decline of 16% is not surprising given its lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

So, as a next step, we compared Agthia Group PJSC's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 7.2% in the same period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Agthia Group PJSC's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Agthia Group PJSC Making Efficient Use Of Its Profits?

Despite having a normal three-year median payout ratio of 46% (where it is retaining 54% of its profits), Agthia Group PJSC has seen a decline in earnings as we saw above. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Moreover, Agthia Group PJSC has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 57% over the next three years. Still, forecasts suggest that Agthia Group PJSC's future ROE will rise to 6.9% 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

In total, we're a bit ambivalent about Agthia Group PJSC's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 3 risks we have identified for Agthia Group PJSC by visiting our risks dashboard for free on our platform here.

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