Emirates Integrated Telecommunications Company PJSC's (DFM:DU) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Emirates Integrated Telecommunications Company PJSC's (DFM:DU) stock up by 7.8% over the past three months. However, the company's financials look a bit inconsistent and market outcomes are ultimately driven by long-term fundamentals, meaning that the stock could head in either direction. In this article, we decided to focus on Emirates Integrated Telecommunications Company PJSC's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Emirates Integrated Telecommunications Company 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 Emirates Integrated Telecommunications Company PJSC is:

22% = د.إ1.8b ÷ د.إ8.5b (Based on the trailing twelve months to September 2020).

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 AED0.22.

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. 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.

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

To start with, Emirates Integrated Telecommunications Company PJSC's ROE looks acceptable. Especially when compared to the industry average of 9.7% the company's ROE looks pretty impressive. As you might expect, the 3.1% net income decline reported by Emirates Integrated Telecommunications Company PJSC is a bit of a surprise. Therefore, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.

That being said, we compared Emirates Integrated Telecommunications Company PJSC's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 6.4% in the same 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is DU fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Emirates Integrated Telecommunications Company PJSC Making Efficient Use Of Its Profits?

Emirates Integrated Telecommunications Company PJSC has a high three-year median payout ratio of 93% (that is, it is retaining 7.3% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 2 risks we have identified for Emirates Integrated Telecommunications Company PJSC by visiting our risks dashboard for free on our platform here.

Moreover, Emirates Integrated Telecommunications Company PJSC has been paying dividends for nine years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 87% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 20%.

Summary

In total, we're a bit ambivalent about Emirates Integrated Telecommunications Company PJSC's performance. While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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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