Declining Stock and Decent Financials: Is The Market Wrong About National Central Cooling Company PJSC (DFM:TABREED)?

With its stock down 8.8% over the past three months, it is easy to disregard National Central Cooling Company PJSC (DFM:TABREED). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to National Central Cooling Company PJSC's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for National Central Cooling Company PJSC

How To Calculate Return On Equity?

ROE 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 National Central Cooling Company PJSC is:

4.6% = د.إ303m ÷ د.إ6.6b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every AED1 worth of shareholders' equity, the company generated AED0.05 in profit.

Although, the last twelve months of results for National Central Cooling Company PJSC non-recurring items such as non-cash deferred tax liability amounting to د.إ358.8m and one-off gains amounting to د.إ30.2m. If we elect to adjust the figures for these one-off items, normalized net profit (from continuing operations) for the last twelve months is د.إ632m, which results in normalized ROE of 9.6%.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

National Central Cooling Company PJSC's Earnings Growth And 4.6% ROE

It is hard to argue that National Central Cooling Company PJSC's ROE is much good in and of itself. Even when compared to the industry average of 8.4%, the ROE figure is pretty disappointing. Therefore, the disappointing ROE therefore provides a background to National Central Cooling Company PJSC's very little net income growth of 4.8% over the past five years.

Next, on comparing National Central Cooling Company PJSC's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 4.6% over the last few years.

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. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for TABREED? You can find out in our latest intrinsic value infographic research report.

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

While National Central Cooling Company PJSC has a decent three-year median payout ratio of 33% (or a retention ratio of 67%), it has seen very little growth in earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, National Central Cooling Company PJSC has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 71% over the next three years. Regardless, the future ROE for National Central Cooling Company PJSC is speculated to rise to 9.8% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Summary

On the whole, we do feel that National Central Cooling Company PJSC has some positive attributes. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.