Is Dixon Technologies (India) Limited's(NSE:DIXON) Recent Stock Performance Tethered To Its Strong Fundamentals?

Dixon Technologies (India)'s (NSE:DIXON) stock is up by a considerable 66% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Dixon Technologies (India)'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Dixon Technologies (India)

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 Dixon Technologies (India) is:

24% = ₹1.4b ÷ ₹6.0b (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.24 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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 24% ROE

To begin with, Dixon Technologies (India) seems to have a respectable ROE. Especially when compared to the industry average of 9.4% the company's ROE looks pretty impressive. This certainly adds some context to Dixon Technologies (India)'s exceptional 26% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared Dixon Technologies (India)'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 5.1% in the same period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Dixon Technologies (India) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Dixon Technologies (India) Using Its Retained Earnings Effectively?

Dixon Technologies (India) has a really low three-year median payout ratio of 3.6%, meaning that it has the remaining 96% 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 three 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's future payout ratio is expected to drop to 2.7% over the next three years. As a result, the expected drop in Dixon Technologies (India)'s payout ratio explains the anticipated rise in the company's future ROE to 33%, over the same period.

Conclusion

On the whole, we feel that Dixon Technologies (India)'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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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