Weak Financial Prospects Seem To Be Dragging Down Aramex PJSC (DFM:ARMX) Stock

With its stock down 19% over the past three months, it is easy to disregard Aramex PJSC (DFM:ARMX). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Aramex PJSC's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Aramex PJSC

How To 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 Aramex PJSC is:

4.7% = د.إ113m ÷ د.إ2.4b (Based on the trailing twelve months to June 2023).

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 AED0.05.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Aramex PJSC's Earnings Growth And 4.7% ROE

It is quite clear that Aramex PJSC's ROE is rather low. Even when compared to the industry average of 9.1%, the ROE figure is pretty disappointing. Given the circumstances, the significant decline in net income by 30% seen by Aramex PJSC over the last five years is not surprising. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

That being said, we compared Aramex 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 21% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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 ARMX? You can find out in our latest intrinsic value infographic research report.

Is Aramex PJSC Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 101% (implying that -0.6% of the profits are retained), most of Aramex PJSC's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. Our risks dashboard should have the 2 risks we have identified for Aramex PJSC.

Moreover, Aramex 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's future payout ratio is expected to drop to 70% over the next three years. As a result, the expected drop in Aramex PJSC's payout ratio explains the anticipated rise in the company's future ROE to 9.7%, over the same period.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Aramex PJSC. Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. 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. 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.