Emaar Development PJSC's (DFM:EMAARDEV) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Emaar Development PJSC's (DFM:EMAARDEV) stock is up by a considerable 22% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Emaar Development PJSC's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Emaar Development 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 Emaar Development PJSC is:

18% = د.إ2.4b ÷ د.إ13b (Based on the trailing twelve months to September 2020).

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

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 18% ROE

To begin with, Emaar Development PJSC seems to have a respectable ROE. On comparing with the average industry ROE of 6.6% the company's ROE looks pretty remarkable. However, for some reason, the higher returns aren't reflected in Emaar Development PJSC's meagre five year net income growth average of 3.9%. That's a bit unexpected from a company which has such a high rate of return. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Given that the industry shrunk its earnings at a rate of 4.7% in the same period, the net income growth of the company is quite impressive.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Emaar Development PJSC's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Emaar Development PJSC Efficiently Re-investing Its Profits?

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.

Our latest analyst data shows that the future payout ratio of the company is expected to rise to 41% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 12%, over the same period.

Summary

On the whole, we feel that Emaar Development PJSC's performance has been quite good. 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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