Will Weakness in DocCheck AG's (ETR:AJ91) Stock Prove Temporary Given Strong Fundamentals?

By
Simply Wall St
Published
May 10, 2022
XTRA:AJ91
Source: Shutterstock

With its stock down 26% over the past three months, it is easy to disregard DocCheck (ETR:AJ91). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to DocCheck's ROE today.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for DocCheck

How Is ROE Calculated?

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 DocCheck is:

31% = €12m ÷ €38m (Based on the trailing twelve months to December 2021).

The 'return' is the profit over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.31 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of DocCheck's Earnings Growth And 31% ROE

First thing first, we like that DocCheck has an impressive ROE. Secondly, even when compared to the industry average of 12% the company's ROE is quite impressive. As a result, DocCheck's exceptional 41% net income growth seen over the past five years, doesn't come as a surprise.

We then compared DocCheck's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 15% in the same period.

past-earnings-growth
XTRA:AJ91 Past Earnings Growth May 10th 2022

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is AJ91 worth today? The intrinsic value infographic in our free research report helps visualize whether AJ91 is currently mispriced by the market.

Is DocCheck Using Its Retained Earnings Effectively?

DocCheck's three-year median payout ratio is a pretty moderate 44%, meaning the company retains 56% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like DocCheck is reinvesting its earnings efficiently.

Additionally, DocCheck has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, we are pretty happy with DocCheck's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 3 risks we have identified for DocCheck.

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