Dominion Hosting Holding S.p.A. (BIT:DHH) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Dominion Hosting Holding's (BIT:DHH) stock is up by a considerable 6.9% over the past month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Dominion Hosting Holding'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.

View our latest analysis for Dominion Hosting Holding

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Dominion Hosting Holding is:

3.1% = €245k ÷ €7.8m (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.03.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Dominion Hosting Holding's Earnings Growth And 3.1% ROE

As you can see, Dominion Hosting Holding's ROE looks pretty weak. Not just that, even compared to the industry average of 12%, the company's ROE is entirely unremarkable. Thus, the low net income growth of 4.2% seen by Dominion Hosting Holding over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Dominion Hosting Holding's reported growth was lower than the industry growth of 13% in the same period, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Dominion Hosting Holding's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Dominion Hosting Holding Making Efficient Use Of Its Profits?

Conclusion

In total, we're a bit ambivalent about Dominion Hosting Holding's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 2 risks we have identified for Dominion Hosting Holding.

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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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