Emaar Development PJSC's (DFM:EMAARDEV) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Emaar Development PJSC (DFM:EMAARDEV) has had a rough month with its share price down 4.5%. 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 an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Emaar Development PJSC

How Do You Calculate Return On Equity?

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:

15% = د.إ2.1b ÷ د.إ13b (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. Another way to think of that is that for every AED1 worth of equity, the company was able to earn AED0.15 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.

Emaar Development PJSC's Earnings Growth And 15% ROE

When you first look at it, Emaar Development PJSC's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 5.1% doesn't go unnoticed by us. Having said that, Emaar Development PJSC's net income growth over the past five years is more or less flat. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the low to flat growth in earnings could also be the result of this.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Emaar Development PJSC compares quite favourably to the industry average, which shows a decline of 2.7% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Development PJSC is trading on a high P/E or a low P/E, relative to its industry.

Is Emaar Development PJSC Using Its Retained Earnings Effectively?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 40% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 8.9%, over the same period.

Conclusion

Overall, we are quite pleased with Emaar Development PJSC's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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. 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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