Is National Central Cooling Company PJSC's (DFM:TABREED) Stock On A Downtrend As A Result Of Its Poor Financials?

National Central Cooling Company PJSC (DFM:TABREED) has had a rough week with its share price down 5.0%. 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. Particularly, we will be paying attention to National Central Cooling Company PJSC's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for National Central Cooling Company PJSC

How Do You Calculate Return On Equity?

The formula for ROE 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:

4.6% = د.إ309m ÷ د.إ6.7b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. That means that for every AED1 worth of shareholders' equity, the company generated AED0.05 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. 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 4.6% ROE

As you can see, National Central Cooling Company PJSC's ROE looks pretty weak. Even compared to the average industry ROE of 8.7%, the company's ROE is quite dismal. Thus, the low net income growth of 2.1% seen by National Central Cooling Company 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 National Central Cooling Company PJSC's reported growth was lower than the industry growth of 4.0% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 51% (that is, the company retains only 49% of its income) over the past three years for National Central Cooling Company PJSC suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

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. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 79% over the next three years. Regardless, the future ROE for National Central Cooling Company PJSC is speculated to rise to 9.6% 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

In total, we would have a hard think before deciding on any investment action concerning 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.