Danieli & C. Officine Meccaniche S.p.A.'s (BIT:DAN) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Danieli & C. Officine Meccaniche's (BIT:DAN) stock is up by a considerable 23% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Danieli & C. Officine Meccaniche's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How Is ROE Calculated?

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 Danieli & C. Officine Meccaniche is:

9.8% = €269m ÷ €2.8b (Based on the trailing twelve months to December 2024).

The 'return' is the profit over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.10.

See our latest analysis for Danieli & C. Officine Meccaniche

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.

Danieli & C. Officine Meccaniche's Earnings Growth And 9.8% ROE

At first glance, Danieli & C. Officine Meccaniche's ROE doesn't look very promising. However, its ROE is similar to the industry average of 9.1%, so we won't completely dismiss the company. Particularly, the exceptional 31% net income growth seen by Danieli & C. Officine Meccaniche over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Danieli & C. Officine Meccaniche's growth is quite high when compared to the industry average growth of 16% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is DAN worth today? The intrinsic value infographic in our free research report helps visualize whether DAN is currently mispriced by the market.

Is Danieli & C. Officine Meccaniche Efficiently Re-investing Its Profits?

Danieli & C. Officine Meccaniche has a really low three-year median payout ratio of 9.2%, meaning that it has the remaining 91% left over to reinvest into its business. So it looks like Danieli & C. Officine Meccaniche is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Danieli & C. Officine Meccaniche is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 10%. Accordingly, forecasts suggest that Danieli & C. Officine Meccaniche's future ROE will be 8.6% which is again, similar to the current ROE.

Conclusion

In total, it does look like Danieli & C. Officine Meccaniche has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.