Dixon Technologies (India) Limited's (NSE:DIXON) Stock Is Going Strong: Is the Market Following Fundamentals?

Dixon Technologies (India) (NSE:DIXON) has had a great run on the share market with its stock up by a significant 36% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Dixon Technologies (India)'s ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Dixon Technologies (India)

How Do You Calculate Return On Equity?

Return on equity 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 Dixon Technologies (India) is:

29% = ₹7.5b ÷ ₹26b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.29 in profit.

What Is The Relationship Between ROE And 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Dixon Technologies (India)'s Earnings Growth And 29% ROE

To begin with, Dixon Technologies (India) has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 8.1% the company's ROE is quite impressive. So, the substantial 34% net income growth seen by Dixon Technologies (India) over the past five years isn't overly surprising.

As a next step, we compared Dixon Technologies (India)'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 20%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One 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 prospects. So, you may want to check if Dixon Technologies (India) is trading on a high P/E or a low P/E, relative to its industry.

Is Dixon Technologies (India) Making Efficient Use Of Its Profits?

Dixon Technologies (India) has a really low three-year median payout ratio of 6.6%, meaning that it has the remaining 93% left over to reinvest into its business. So it looks like Dixon Technologies (India) is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Dixon Technologies (India) has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 5.3% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 32%.

Conclusion

In total, we are pretty happy with Dixon Technologies (India)'s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.