Has Abu Dhabi National Energy Company PJSC (ADX:TAQA) Stock's Recent Performance Got Anything to Do With Its Financial Health?

Abu Dhabi National Energy Company PJSC's (ADX:TAQA) stock up by 3.0% over the past week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Abu Dhabi National Energy Company PJSC's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How To Calculate Return On Equity?

Return on equity 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 Abu Dhabi National Energy Company PJSC is:

6.9% = د.إ7.3b ÷ د.إ105b (Based on the trailing twelve months to December 2024).

The 'return' is the profit over the last twelve months. That means that for every AED1 worth of shareholders' equity, the company generated AED0.07 in profit.

Check out our latest analysis for Abu Dhabi National Energy Company PJSC

What Is The Relationship Between ROE And Earnings Growth?

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

Abu Dhabi National Energy Company PJSC's Earnings Growth And 6.9% 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 8.4%. Moreover, we are quite pleased to see that Abu Dhabi National Energy Company PJSC's net income grew significantly at a rate of 22% over the last five years. Given the low ROE, it is likely that there could be some other reasons behind this growth as well. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Abu Dhabi National Energy Company PJSC's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 19% in the same period.

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. If you're wondering about Abu Dhabi National Energy Company PJSC's's valuation, check out this gauge of its price-to-earnings ratio, as compared 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. So it seems that Abu Dhabi National Energy Company PJSC is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Abu Dhabi National Energy Company PJSC is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.

Conclusion

On the whole, we do feel that Abu Dhabi National Energy Company PJSC has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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. To know the 2 risks we have identified for Abu Dhabi National Energy Company PJSC visit our risks dashboard for free.

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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.