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

With its stock down 8.2% over the past three months, it is easy to disregard Aramex PJSC (DFM:ARMX). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Particularly, we will be paying attention to Aramex 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Aramex PJSC

How Do You Calculate Return On Equity?

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 Aramex PJSC is:

6.1% = د.إ152m ÷ د.إ2.5b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every AED1 of its shareholder's investments, the company generates a profit of AED0.06.

Why Is ROE Important For Earnings Growth?

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

Aramex PJSC's Earnings Growth And 6.1% ROE

It is quite clear that Aramex PJSC's ROE is rather low. Further, we noted that the company's ROE is similar to the industry average of 7.4%. Therefore, it might not be wrong to say that the five year net income decline of 33% seen by Aramex PJSC was possibly a result of the disappointing ROE.

So, as a next step, we compared Aramex 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 15% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is ARMX worth today? The intrinsic value infographic in our free research report helps visualize whether ARMX is currently mispriced by the market.

Is Aramex PJSC Using Its Retained Earnings Effectively?

Aramex PJSC's high three-year median payout ratio of 103% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Paying a dividend higher than reported profits is not a sustainable move.

In addition, Aramex PJSC has been paying dividends over a period of eight years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 78% 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 10%, over the same period.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Aramex PJSC. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.

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