Should Weakness in Dottikon ES Holding AG's (VTX:DESN) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 15% over the past three months, it is easy to disregard Dottikon ES Holding (VTX:DESN). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Dottikon ES Holding's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Dottikon ES Holding

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 Dottikon ES Holding is:

8.2% = CHF75m ÷ CHF918m (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CHF1 worth of shareholders' equity, the company generated CHF0.08 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Dottikon ES Holding's Earnings Growth And 8.2% ROE

When you first look at it, Dottikon ES Holding's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 13%, the company's ROE leaves us feeling even less enthusiastic. Despite this, surprisingly, Dottikon ES Holding saw an exceptional 20% net income growth over the past five years. So, there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Dottikon ES Holding'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 13%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Dottikon ES Holding's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Dottikon ES Holding Using Its Retained Earnings Effectively?

Dottikon ES Holding doesn't pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

Overall, we feel that Dottikon ES Holding certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 1 risk we have identified for Dottikon ES Holding visit our risks dashboard for free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.