Does Gulf Medical Projects Company (PJSC)'s (ADX:GMPC) Weak Fundamentals Mean That The Stock Could Move In The Opposite Direction?

Gulf Medical Projects Company (PJSC)'s (ADX:GMPC) stock up by 3.0% over the past three months. However, its weak financial performance indicators makes us a bit doubtful if that trend could continue. Specifically, we decided to study Gulf Medical Projects Company (PJSC)'s ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Gulf Medical Projects Company (PJSC)

How Is ROE Calculated?

ROE 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 Gulf Medical Projects Company (PJSC) is:

6.7% = د.إ72m ÷ د.إ1.1b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each AED1 of shareholders' capital it has, the company made AED0.07 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Gulf Medical Projects Company (PJSC)'s Earnings Growth And 6.7% ROE

It is hard to argue that Gulf Medical Projects Company (PJSC)'s ROE is much good in and of itself. Even when compared to the industry average of 9.1%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 25% seen by Gulf Medical Projects Company (PJSC) was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

However, when we compared Gulf Medical Projects Company (PJSC)'s growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 8.2% in the same period. This is quite worrisome.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for GMPC? You can find out in our latest intrinsic value infographic research report

Is Gulf Medical Projects Company (PJSC) Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 99% (implying that 0.6% of the profits are retained), most of Gulf Medical Projects Company (PJSC)'s profits are being paid to shareholders, which explains the company's shrinking earnings. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. To know the 3 risks we have identified for Gulf Medical Projects Company (PJSC) visit our risks dashboard for free.

In addition, Gulf Medical Projects Company (PJSC) has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

On the whole, Gulf Medical Projects Company (PJSC)'s performance is quite a big let-down. Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Gulf Medical Projects Company (PJSC) and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. 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.
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