Al Mahhar Holding Company Q.P.S.C.'s (DSM:MHAR) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Al Mahhar Holding Company Q.P.S.C's (DSM:MHAR) stock is up by a considerable 29% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Al Mahhar Holding Company Q.P.S.C'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Al Mahhar Holding Company Q.P.S.C

How To Calculate Return On Equity?

Return on equity 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 Al Mahhar Holding Company Q.P.S.C is:

7.1% = ر.ق23m ÷ ر.ق327m (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each QAR1 of shareholders' capital it has, the company made QAR0.07 in profit.

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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Al Mahhar Holding Company Q.P.S.C's Earnings Growth And 7.1% ROE

It is hard to argue that Al Mahhar Holding Company Q.P.S.C's ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 8.7% either. Looking at Al Mahhar Holding Company Q.P.S.C's exceptional 70% five-year net income growth in particular, we are definitely impressed. Considering the low ROE, it is quite possible that there might also be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then compared Al Mahhar Holding Company Q.P.S.C's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 16% in the same 5-year period.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Al Mahhar Holding Company Q.P.S.C's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Al Mahhar Holding Company Q.P.S.C Using Its Retained Earnings Effectively?

Al Mahhar Holding Company Q.P.S.C's significant three-year median payout ratio of 73% (where it is retaining only 27% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Conclusion

Overall, we feel that Al Mahhar Holding Company Q.P.S.C certainly does have some positive factors to consider. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Al Mahhar Holding Company Q.P.S.C's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.