Is Dubai Electricity and Water Authority (PJSC)'s (DFM:DEWA) Stock On A Downtrend As A Result Of Its Poor Financials?

It is hard to get excited after looking at Dubai Electricity and Water Authority (PJSC)'s (DFM:DEWA) recent performance, when its stock has declined 1.1% over the past three months. 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. In this article, we decided to focus on Dubai Electricity and Water Authority (PJSC)'s ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Is ROE Calculated?

The formula for ROE 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:

7.9% = د.إ7.6b ÷ د.إ95b (Based on the trailing twelve months to June 2025).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every AED1 worth of equity, the company was able to earn AED0.08 in profit.

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

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Dubai Electricity and Water Authority (PJSC)'s Earnings Growth And 7.9% 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 8.5%. Therefore, the low net income growth of 4.5% seen by Dubai Electricity and Water Authority (PJSC) over the past five years could probably be the result of it having a lower ROE.

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 14% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for DEWA? You can find out in our latest intrinsic value infographic research report.

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

With a high three-year median payout ratio of 81% (or a retention ratio of 19%), most of Dubai Electricity and Water Authority (PJSC)'s profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Moreover, Dubai Electricity and Water Authority (PJSC) has been paying dividends for three years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 81%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 8.9%.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Dubai Electricity and Water Authority (PJSC). The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.