Datametrex AI Limited's (CVE:DM) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

By
Simply Wall St
Published
June 04, 2021
TSXV:DM

Datametrex AI (CVE:DM) has had a rough week with its share price down 17%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Datametrex AI's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Datametrex AI

How Do You Calculate Return On Equity?

ROE 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 Datametrex AI is:

30% = CA$5.3m ÷ CA$18m (Based on the trailing twelve months to March 2021).

The 'return' refers to a company's earnings over the last year. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.30.

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.

A Side By Side comparison of Datametrex AI's Earnings Growth And 30% ROE

First thing first, we like that Datametrex AI has an impressive ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. Under the circumstances, Datametrex AI's considerable five year net income growth of 25% was to be expected.

As a next step, we compared Datametrex AI's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 5.3%.

past-earnings-growth
TSXV:DM Past Earnings Growth June 5th 2021

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Datametrex AI's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Datametrex AI Efficiently Re-investing Its Profits?

Conclusion

On the whole, we feel that Datametrex AI's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard would have the 5 risks we have identified for Datametrex AI.

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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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