Is Dialog Group Berhad's (KLSE:DIALOG) Stock Price Struggling As A Result Of Its Mixed Financials?

Dialog Group Berhad (KLSE:DIALOG) has had a rough three months with its share price down 12%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Particularly, we will be paying attention to Dialog Group Berhad's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Dialog Group Berhad

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 Dialog Group Berhad is:

8.5% = RM498m ÷ RM5.9b (Based on the trailing twelve months to December 2022).

The 'return' is the income the business earned over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.08 in profit.

What Has ROE Got To Do With Earnings Growth?

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

Dialog Group Berhad's Earnings Growth And 8.5% ROE

On the face of it, Dialog Group Berhad's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 7.6%, we may spare it some thought. Still, Dialog Group Berhad has seen a flat net income growth over the past five years. Remember, the company's ROE is not particularly great to begin with. Hence, this provides some context to the flat earnings growth seen by the company.

We then compared Dialog Group Berhad's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 7.6% in the same period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Dialog Group Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Dialog Group Berhad Making Efficient Use Of Its Profits?

In spite of a normal three-year median payout ratio of 32% (or a retention ratio of 68%), Dialog Group Berhad hasn't seen much growth in its earnings. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Additionally, Dialog Group Berhad has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 37%. However, Dialog Group Berhad's ROE is predicted to rise to 11% despite there being no anticipated change in its payout ratio.

Conclusion

On the whole, we feel that the performance shown by Dialog Group Berhad can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.