Emirates Telecommunications Group Company PJSC's (ADX:EAND) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Emirates Telecommunications Group Company PJSC's (ADX:EAND) stock is up by a considerable 17% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Emirates Telecommunications Group Company 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 Emirates Telecommunications Group Company PJSC

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Emirates Telecommunications Group Company PJSC is:

22% = د.إ11b ÷ د.إ50b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every AED1 worth of equity, the company was able to earn AED0.22 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. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Emirates Telecommunications Group Company PJSC's Earnings Growth And 22% ROE

On the face of it, Emirates Telecommunications Group Company PJSC's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 12% doesn't go unnoticed by us. Yet, Emirates Telecommunications Group Company PJSC has posted measly growth of 4.1% over the past five years. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the low growth in earnings could also be the result of this.

We then compared Emirates Telecommunications Group Company PJSC's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 13% in the same 5-year period, which is a bit concerning.

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. Has the market priced in the future outlook for EAND? You can find out in our latest intrinsic value infographic research report.

Is Emirates Telecommunications Group Company PJSC Using Its Retained Earnings Effectively?

Emirates Telecommunications Group Company PJSC has a three-year median payout ratio of 71% (implying that it keeps only 29% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

In addition, Emirates Telecommunications Group Company PJSC has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 67%. Accordingly, forecasts suggest that Emirates Telecommunications Group Company PJSC's future ROE will be 22% which is again, similar to the current ROE.

Conclusion

On the whole, we feel that the performance shown by Emirates Telecommunications Group Company PJSC can be open to many interpretations. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. 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. 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.