Shares of Ghitha Holding PJSC (ADX:GHITHA) are up 116% in the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. In particular, we will pay attention to the ROE of Ghitha Holding PJSC today.
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 is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
See our latest analysis for Ghitha Holding PJSC
How do you calculate return on equity?
the ROE formula East:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Ghitha Holding PJSC is:
15% = د.إ34m ÷ د.إ219m (Based on the last twelve months to September 2021).
The “yield” is the profit of the last twelve months. One way to conceptualize this is that for every AED1 of share capital it has, the company has made a profit of AED 0.15.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. 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 all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
A side-by-side comparison of Ghitha Holding PJSC’s earnings growth and 15% ROE
At first glance, there is not much to say about the ROE of Ghitha Holding PJSC. Although further investigation shows that the company’s ROE is above the industry average of 9.2%, which we certainly cannot ignore. This likely partly explains Ghitha Holding PJSC’s moderate growth of 9.4% over the past five years, among other factors. That being said, the company has a slightly weak ROE to start with, just that it’s above the industry average. Therefore, earnings growth could also be the result of other factors. For example, it is possible that the industry at large is going through a phase of strong growth or that the company has a low distribution rate.
Then, comparing with the net income growth of the industry, we found that the growth of Ghitha Holding PJSC is quite high compared to the industry average growth of 7.7% over the same period, which is great to have.
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. A 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 outlook. Thus, you may want to check whether Ghitha Holding PJSC is trading on a high P/E or a low P/E, relative to its industry.
Does Ghitha Holding PJSC effectively reinvest its profits?
Ghitha Holding PJSC does not currently pay any dividends, which basically means that it has reinvested all of its profits back into the business. This certainly contributes to the decent number of earnings growth we discussed above.
Overall, we are quite satisfied with the performance of Ghitha Holding PJSC. In particular, we appreciate the fact that the company reinvests heavily in its business at a moderate rate of return. Unsurprisingly, this led to impressive earnings growth. If the company continues to increase earnings as it has, it could have a positive impact on its share price given how earnings per share influence prices over the long term. Let’s not forget that business risk is also one of the factors that affect the stock price. This is therefore also an important area for investors to pay attention to before making a decision on a company. You can see the 2 risks we have identified for Ghitha Holding PJSC by visiting our risk dashboard for free on our platform here.
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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.