Emirates Integrated Telecommunications Company PJSC (DFM:DU) stock is doing well, but the fundamentals look uncertain: what does the future hold?

Most readers will already know that shares of Emirates Integrated Telecommunications Company PJSC (DFM:DU) rose a significant 5.8% over the past month. But the company’s key financial indicators seem to differ across the board, leading us to wonder whether the company’s current share price momentum can be sustained or not. In particular, we will pay attention today to the ROE of Emirates Integrated Telecommunications Company PJSC.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest analysis for Emirates Integrated Telecommunications Company PJSC

How to calculate return on equity?

The ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Emirates Integrated Telecommunications Company PJSC is:

14% = د.إ1.2b ÷ د.إ8.6b (Based on the last twelve months to June 2022).

“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every AED1 of share capital it has, the company has made a profit of AED 0.14.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

A side-by-side comparison of integrated telecom company Emirates PJSC’s earnings growth and ROE of 14%

At first glance, the ROE of Emirates Integrated Telecommunications Company PJSC does not have much to say. However, the fact that the company’s ROE is higher than the industry average ROE of 12% is certainly interesting. But given Emirates Integrated Telecommunications Company PJSC’s five-year net income decline of 9.3% over the past five years, we might rethink that. Keep in mind that the company has a slightly low ROE. It’s just that the industry’s ROE is lower. So that could be one of the factors slowing earnings growth.

However, when we compared the growth of Emirates Integrated Telecommunications Company PJSC with the industry, we found that although the company’s profits declined, the industry recorded profit growth of 11% over the same period. period. It’s quite worrying.

DFM:DU Past Earnings Growth August 16, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Has the market priced in the future prospects for depleted uranium? You can find out in our latest infographic research report on intrinsic value.

Is the integrated telecommunications company Emirates PJSC using its profits efficiently?

The decline in profits at Emirates Integrated Telecommunications Company PJSC is not surprising given that the company spends most of its profits paying dividends, judging by its three-year median payout ratio of 89% (or a retention rate of 11%). With very little left to reinvest in the business, earnings growth is far from likely.

Furthermore, Emirates Integrated Telecommunications Company PJSC has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of growth. of the company. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be approximately 89%. As a result, the company’s future ROE is also not expected to change much, with analysts predicting an ROE of 15%.

Summary

All in all, we are a bit ambivalent about the performance of Emirates Integrated Telecommunications Company PJSC. On the one hand, the company has a decent rate of return, however, its earnings growth figure is quite disappointing and, as mentioned earlier, low retained earnings are hampering growth. That said, looking at current analyst estimates, we found that the company’s earnings growth rate should see a huge improvement. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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Sean B. Jackson