D.K. Enterprises Global Limited's (NSE:DKEGL) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 14% over the past three months, it is easy to disregard D.K. Enterprises Global (NSE:DKEGL). 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 D.K. Enterprises Global'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for D.K. Enterprises Global

How To 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 D.K. Enterprises Global is:

18% = ₹44m ÷ ₹241m (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.18 in profit.

What Is The Relationship Between ROE And 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. 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.

D.K. Enterprises Global's Earnings Growth And 18% ROE

At first glance, D.K. Enterprises Global seems to have a decent ROE. Especially when compared to the industry average of 12% the company's ROE looks pretty impressive. Probably as a result of this, D.K. Enterprises Global was able to see an impressive net income growth of 24% over the last 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.

As a next step, we compared D.K. Enterprises Global'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 18%.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about D.K. Enterprises Global's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is D.K. Enterprises Global Making Efficient Use Of Its Profits?

The three-year median payout ratio for D.K. Enterprises Global is 26%, which is moderately low. The company is retaining the remaining 74%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like D.K. Enterprises Global is reinvesting its earnings efficiently.

While D.K. Enterprises Global has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Conclusion

On the whole, we feel that D.K. Enterprises Global'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. 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. You can see the 3 risks we have identified for D.K. Enterprises Global by visiting our risks dashboard for free on our platform here.

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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.