Is Emirates Integrated Telecommunications Company PJSC's (DFM:DU) Stock Price Struggling As A Result Of Its Mixed Financials?

Emirates Integrated Telecommunications Company PJSC (DFM:DU) has had a rough three months with its share price down 1.7%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Specifically, we decided to study Emirates Integrated Telecommunications Company PJSC's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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

18% = د.إ1.6b ÷ د.إ8.9b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. That means that for every AED1 worth of shareholders' equity, the company generated AED0.18 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.

A Side By Side comparison of Emirates Integrated Telecommunications Company PJSC's Earnings Growth And 18% ROE

At first glance, Emirates Integrated Telecommunications Company PJSC's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 12% which we definitely can't overlook. But then again, seeing that Emirates Integrated Telecommunications Company PJSC's net income shrunk at a rate of 8.1% in the past five years, makes us think again. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the shrinking earnings.

So, as a next step, we compared Emirates Integrated Telecommunications Company PJSC's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 11% over the last few years.

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). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for DU? You can find out in our latest intrinsic value infographic research report.

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

Emirates Integrated Telecommunications Company PJSC has a high three-year median payout ratio of 85% (that is, it is retaining 15% 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 a little being reinvested into the business, earnings growth would obviously be low or non-existent.

Moreover, Emirates Integrated Telecommunications Company PJSC has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 95% of its profits over the next three years. Accordingly, forecasts suggest that Emirates Integrated Telecommunications Company PJSC's future ROE will be 17% which is again, similar to the current ROE.

Conclusion

Overall, we have mixed feelings about Emirates Integrated Telecommunications Company PJSC. Primarily, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE. Bear in mind, the company reinvests a small portion of its profits, which explains the lack of growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.