Dubai Electricity and Water Authority (PJSC)'s (DFM:DEWA) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Dubai Electricity and Water Authority (PJSC) (DFM:DEWA) has had a great run on the share market with its stock up by a significant 6.9% over the last month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Dubai Electricity and Water Authority (PJSC)'s ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Dubai Electricity and Water Authority (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 Dubai Electricity and Water Authority (PJSC) is:

8.8% = د.إ8.1b ÷ د.إ93b (Based on the trailing twelve months to March 2023).

The 'return' is the yearly profit. That means that for every AED1 worth of shareholders' equity, the company generated AED0.09 in profit.

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. 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.

Dubai Electricity and Water Authority (PJSC)'s Earnings Growth And 8.8% ROE

It is quite clear that Dubai Electricity and Water Authority (PJSC)'s ROE is rather low. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 10%. However, the modest 5.1% net income growth seen by Dubai Electricity and Water Authority (PJSC) over the past five years is a positive sign. Given the low ROE, it is likely that there could be some other aspects that are driving this growth as well. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Dubai Electricity and Water Authority (PJSC)'s reported growth was lower than the industry growth of 8.7% over the last few years, which is not something we like to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is DEWA fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Dubai Electricity and Water Authority (PJSC) Making Efficient Use Of Its Profits?

Dubai Electricity and Water Authority (PJSC) has a significant three-year median payout ratio of 62%, meaning that it is left with only 38% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

While Dubai Electricity and Water Authority (PJSC) has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 84% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Conclusion

Overall, we have mixed feelings about Dubai Electricity and Water Authority (PJSC). While the company has posted a decent earnings growth, We do feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings at a higher rate of return. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Dubai Electricity and Water Authority (PJSC)'s past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.