Easy Lease Motor Cycle Rental P.S.C.'s (ADX:EASYLEASE) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

Easy Lease Motor Cycle Rental P.S.C (ADX:EASYLEASE) has had a rough three months with its share price down 15%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Easy Lease Motor Cycle Rental P.S.C's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Easy Lease Motor Cycle Rental P.S.C

How Is ROE Calculated?

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 Easy Lease Motor Cycle Rental P.S.C is:

21% = د.إ44m ÷ د.إ208m (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each AED1 of shareholders' capital it has, the company made AED0.21 in profit.

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. 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 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.

Easy Lease Motor Cycle Rental P.S.C's Earnings Growth And 21% ROE

At first glance, Easy Lease Motor Cycle Rental P.S.C's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 7.7% doesn't go unnoticed by us. Consequently, this likely laid the ground for the decent growth of 13% seen over the past five years by Easy Lease Motor Cycle Rental P.S.C. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence there might be some other aspects that are causing earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

We then performed a comparison between Easy Lease Motor Cycle Rental P.S.C's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 11% in the same 5-year 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 Easy Lease Motor Cycle Rental P.S.C is trading on a high P/E or a low P/E, relative to its industry.

Is Easy Lease Motor Cycle Rental P.S.C Efficiently Re-investing Its Profits?

Easy Lease Motor Cycle Rental P.S.C doesn't pay any regular dividends, meaning that all of its profits are being reinvested in the business, which explains the fair bit of earnings growth the company has seen.

Summary

On the whole, we feel that Easy Lease Motor Cycle Rental P.S.C's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard would have the 3 risks we have identified for Easy Lease Motor Cycle Rental P.S.C.

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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.

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