Is National Central Cooling Company PJSC's (DFM:TABREED) Recent Performance Underpinned By Weak Financials?

National Central Cooling Company PJSC (DFM:TABREED) has had a rough three months with its share price down 11%. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Specifically, we decided to study National Central Cooling Company PJSC's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How Do You 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:

8.7% = د.إ603m ÷ د.إ7.0b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each AED1 of shareholders' capital it has, the company made AED0.09 in profit.

Check out our latest analysis for National Central Cooling Company PJSC

Why Is ROE Important For 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 8.7% ROE

It is hard to argue that National Central Cooling Company PJSC's ROE is much good in and of itself. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 9.9%. Thus, the low ROE provides some context to National Central Cooling Company PJSC's flat net income growth over the past five years.

Next, on comparing with the industry net income growth, we found that National Central Cooling Company PJSC's reported growth was lower than the industry growth of 2.4% 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. 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. Is TABREED fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is National Central Cooling Company PJSC Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 58% (implying that the company keeps only 42% 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.

In addition, National Central Cooling Company PJSC has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 77% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Summary

On the whole, National Central Cooling Company PJSC's performance is quite a big let-down. 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.