Could The Market Be Wrong About Emaar Development PJSC (DFM:EMAARDEV) Given Its Attractive Financial Prospects?

Emaar Development PJSC (DFM:EMAARDEV) has had a rough month with its share price down 9.7%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Emaar Development 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Emaar Development PJSC is:

33% = د.إ10b ÷ د.إ31b (Based on the trailing twelve months to March 2025).

The 'return' is the yearly profit. One way to conceptualize this is that for each AED1 of shareholders' capital it has, the company made AED0.33 in profit.

View our latest analysis for Emaar Development PJSC

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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Emaar Development PJSC's Earnings Growth And 33% ROE

To start with, Emaar Development PJSC's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.8%. This certainly adds some context to Emaar Development PJSC's exceptional 30% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing Emaar Development PJSC's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 33% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. 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. Is EMAARDEV fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Emaar Development PJSC Making Efficient Use Of Its Profits?

Emaar Development PJSC's three-year median payout ratio is a pretty moderate 34%, meaning the company retains 66% of its income. By the looks of it, the dividend is well covered and Emaar Development PJSC is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Emaar Development PJSC is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 26% over the next three years. However, the company's ROE is not expected to change by much despite the lower expected payout ratio.

Summary

Overall, we are quite pleased with Emaar Development PJSC's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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.