Abu Dhabi National Energy Company PJSC (ADX:TAQA) On An Uptrend: Could Fundamentals Be Driving The Stock?

Abu Dhabi National Energy Company PJSC's (ADX:TAQA) stock up by 8.0% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Abu Dhabi National Energy Company PJSC's ROE in this article.

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

See our latest analysis for Abu Dhabi National Energy Company PJSC

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 Abu Dhabi National Energy Company PJSC is:

7.6% = د.إ7.7b ÷ د.إ102b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every AED1 worth of equity, the company was able to earn AED0.08 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Abu Dhabi National Energy Company PJSC's Earnings Growth And 7.6% ROE

It is hard to argue that Abu Dhabi National Energy Company PJSC's ROE is much good in and of itself. Further, we noted that the company's ROE is similar to the industry average of 8.3%. Moreover, we are quite pleased to see that Abu Dhabi National Energy Company PJSC's net income grew significantly at a rate of 32% over the last five years. Given the low ROE, it is likely that there could be some other reasons behind this growth as well. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Abu Dhabi National Energy Company PJSC's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 19% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Abu Dhabi National Energy Company PJSC is trading on a high P/E or a low P/E, relative to its industry.

Is Abu Dhabi National Energy Company PJSC Efficiently Re-investing Its Profits?

Abu Dhabi National Energy Company PJSC has a three-year median payout ratio of 45% (where it is retaining 55% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Abu Dhabi National Energy Company PJSC is reinvesting its earnings efficiently.

Besides, Abu Dhabi National Energy Company PJSC has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we do feel that Abu Dhabi National Energy Company PJSC has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 2 risks we have identified for Abu Dhabi National Energy Company PJSC by visiting our risks dashboard for free on our platform here.

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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.