Ghitha Holding PJSC (ADX:GHITHA) stock has been showing weakness lately, but the financial outlook looks decent: is the market wrong?

Ghitha Holding PJSC (ADX:GHITHA) had a difficult month with its share price down 12%. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In particular, we will pay attention to the ROE of Ghitha Holding PJSC today.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

See our latest analysis for Ghitha Holding PJSC

How do you calculate return on equity?

The return on equity formula is:

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

So, based on the above formula, the ROE for Ghitha Holding PJSC is:

3.7% = د.إ109m ÷ د.إ2.9b (Based on the last twelve months to June 2022).

The “yield” is the amount earned after tax over the last twelve months. This therefore means that for each AED1 of its shareholder’s investments, the company generates a profit of AED0.04.

What is the relationship between ROE and earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. 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. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Profit growth and ROE of 3.7% of Ghitha Holding PJSC

It is clear that the ROE of Ghitha Holding PJSC is rather weak. Even compared to the industry average ROE of 9.1%, the company’s ROE is pretty dismal. Despite this, surprisingly, Ghitha Holding PJSC has experienced an exceptional net profit growth of 38% over the past five years. Therefore, there could be other reasons behind this growth. Such as – high revenue retention or effective management in place.

Then, comparing with the net income growth of the sector, we found that the growth of Ghitha Holding PJSC is quite high compared to the sector average growth of 10% over the same period, which is great to see .

ADX:GHITHA Past Earnings Growth September 30, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. 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. If you’re wondering about the valuation of Ghitha Holding PJSC, check out this indicator of its price/earnings ratio, relative to its sector.

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 high earnings growth number we discussed above.

Summary

All in all, it seems that Ghitha Holding PJSC has some positive aspects of its business. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in its profits. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. Our risk dashboard would have the 3 risks we identified for Ghitha Holding PJSC

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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