Are Strong Financial Prospects The Force That Is Driving The Momentum In Delegat Group Limited's NZSE:DGL) Stock?

Delegat Group's (NZSE:DGL) stock is up by a considerable 14% 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. Particularly, we will be paying attention to Delegat Group's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Delegat Group

How To Calculate Return On Equity?

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 Delegat Group is:

16% = NZ$64m ÷ NZ$405m (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every NZ$1 worth of equity, the company was able to earn NZ$0.16 in profit.

What Is The Relationship Between ROE And 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. 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.

Delegat Group's Earnings Growth And 16% ROE

At first glance, Delegat Group seems to have a decent ROE. Especially when compared to the industry average of 6.4% the company's ROE looks pretty impressive. This certainly adds some context to Delegat Group's decent 6.8% net income growth seen over the past five years.

As a next step, we compared Delegat Group's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 6.3% 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. This then helps them determine if the stock is placed for a bright or bleak future. What is DGL worth today? The intrinsic value infographic in our free research report helps visualize whether DGL is currently mispriced by the market.

Is Delegat Group Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 32% (implying that the company retains 68% of its profits), it seems that Delegat Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, Delegat Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 28%. Accordingly, forecasts suggest that Delegat Group's future ROE will be 14% which is again, similar to the current ROE.

Conclusion

On the whole, we feel that Delegat Group's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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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