Fujairah Building Industries P.J.S.C.'s (ADX:FBI) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

Most readers would already be aware that Fujairah Building Industries P.J.S.C's (ADX:FBI) stock increased significantly by 12% over the past week. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. In this article, we decided to focus on Fujairah Building Industries P.J.S.C's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Fujairah Building Industries P.J.S.C

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Fujairah Building Industries P.J.S.C is:

7.4% = د.إ21m ÷ د.إ289m (Based on the trailing twelve months to June 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 AED0.07 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

A Side By Side comparison of Fujairah Building Industries P.J.S.C's Earnings Growth And 7.4% ROE

As you can see, Fujairah Building Industries P.J.S.C's ROE looks pretty weak. However, when compared to the industry average of 6.1%, we do feel there's definitely more to the company. But then again, seeing that Fujairah Building Industries P.J.S.C's five year net income shrunk at a rate of 24% in the past five years, makes us think again. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the decline in earnings could also be the result of this.

That being said, we compared Fujairah Building Industries P.J.S.C's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 24% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Fujairah Building Industries P.J.S.C fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Fujairah Building Industries P.J.S.C Using Its Retained Earnings Effectively?

Fujairah Building Industries P.J.S.C's high three-year median payout ratio of 192% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Paying a dividend beyond their means is usually not viable over the long term. You can see the 3 risks we have identified for Fujairah Building Industries P.J.S.C by visiting our risks dashboard for free on our platform here.

In addition, Fujairah Building Industries P.J.S.C has been paying dividends over a period of seven years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

Overall, we would be extremely cautious before making any decision on Fujairah Building Industries P.J.S.C. While its ROE is pretty moderate, the company is retaining very little of its profits, meaning very little of its profits are being reinvested into the business. This explains the lack or absence of growth in its earnings. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Fujairah Building Industries P.J.S.C 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. 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.