Could National Central Cooling Company PJSC's (DFM:TABREED) Weak Financials Mean That The Market Could Correct Its Share Price?

National Central Cooling Company PJSC's (DFM:TABREED) stock is up by 7.0% over the past three months. However, in this article, we decided to focus on its weak financials, as long-term fundamentals ultimately dictate market outcomes. Particularly, we will be paying attention to National Central Cooling Company PJSC's ROE today.

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.

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How Do You 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 National Central Cooling Company PJSC is:

9.2% = د.إ605m ÷ د.إ6.6b (Based on the trailing twelve months to March 2025).

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

View our latest analysis for National Central Cooling Company 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. 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. 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.

A Side By Side comparison of National Central Cooling Company PJSC's Earnings Growth And 9.2% ROE

It is quite clear that National Central Cooling Company PJSC's ROE is rather low. Further, we noted that the company's ROE is similar to the industry average of 9.3%. Thus, the low ROE provides some context to National Central Cooling Company PJSC's flat net income growth over the past five years.

As a next step, we compared National Central Cooling Company PJSC's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 2.6% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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. What is TABREED worth today? The intrinsic value infographic in our free research report helps visualize whether TABREED is currently mispriced by the market.

Is National Central Cooling Company PJSC Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 77% (implying that the company keeps only 23% of its income) of its business to reinvest into its business), most of National Central Cooling Company PJSC's profits are being paid to shareholders, which explains the absence of growth in earnings.

Moreover, National Central Cooling Company PJSC has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 72% of its profits over the next three years. As a result, National Central Cooling Company PJSC's ROE is not expected to change by much either, which we inferred from the analyst estimate of 9.0% for future ROE.

Summary

Overall, we would be extremely cautious before making any decision on National Central Cooling Company PJSC. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.