Alijarah Holding (Q.P.S.C.)'s (DSM:NLCS) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?

Alijarah Holding (Q.P.S.C.)'s (DSM:NLCS) stock up by 9.6% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Alijarah Holding (Q.P.S.C.)'s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Alijarah Holding (Q.P.S.C.)

How To 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 Alijarah Holding (Q.P.S.C.) is:

6.6% = ر.ق46m ÷ ر.ق699m (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. 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. 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 Alijarah Holding (Q.P.S.C.)'s Earnings Growth And 6.6% ROE

As you can see, Alijarah Holding (Q.P.S.C.)'s ROE looks pretty weak. Still, the company's ROE is higher than the average industry ROE of 2.4% so that's certainly interesting. Even more so, after seeing Alijarah Holding (Q.P.S.C.)'s exceptional 71% net income growth over the past five years. That being said, the company does have a low ROE to begin with, just that its higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. For instance, the company has a low payout ratio or is being managed efficiently

When you consider the fact that the industry earnings have shrunk at a rate of 11% in the same period, the company's net income growth is pretty remarkable.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Alijarah Holding (Q.P.S.C.) is trading on a high P/E or a low P/E, relative to its industry.

Is Alijarah Holding (Q.P.S.C.) Efficiently Re-investing Its Profits?

Alijarah Holding (Q.P.S.C.)'s very high three-year median payout ratio of 180% suggests that the company is paying more to its shareholders than what it is earning. Despite this, the company's earnings grew significantly as we saw above. Having said that, the high payout ratio is definitely risky and something to keep an eye on. You can see the 2 risks we have identified for Alijarah Holding (Q.P.S.C.) by visiting our risks dashboard for free on our platform here.

Moreover, Alijarah Holding (Q.P.S.C.) is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

Overall, we feel that Alijarah Holding (Q.P.S.C.) certainly does have some positive factors to consider. Especially the growth in earnings which was backed by a moderate ROE. Still, the ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Alijarah Holding (Q.P.S.C.)'s past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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This article by Simply Wall St is general in nature. 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.
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