Is Emaar Properties PJSC's (DFM:EMAAR) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Emaar Properties PJSC (DFM:EMAAR) has had a great run on the share market with its stock up by a significant 51% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Emaar Properties PJSC's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Emaar Properties PJSC

How To Calculate Return On Equity?

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 Emaar Properties PJSC is:

18% = د.إ16b ÷ د.إ92b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. So, this means that for every AED1 of its shareholder's investments, the company generates a profit of AED0.18.

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.

A Side By Side comparison of Emaar Properties PJSC's Earnings Growth And 18% ROE

On the face of it, Emaar Properties PJSC's ROE is not much to talk about. However, its ROE is similar to the industry average of 15%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that Emaar Properties PJSC's net income grew significantly at a rate of 25% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Emaar Properties PJSC's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 25% in the same 5-year period.

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). Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Emaar Properties PJSC is trading on a high P/E or a low P/E, relative to its industry.

Is Emaar Properties PJSC Making Efficient Use Of Its Profits?

The three-year median payout ratio for Emaar Properties PJSC is 29%, which is moderately low. The company is retaining the remaining 71%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Emaar Properties PJSC is reinvesting its earnings efficiently.

Besides, Emaar Properties 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. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 68% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 13%, over the same period.

Conclusion

In total, it does look like Emaar Properties PJSC has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.