Most readers would already be aware that Dedicare's (STO:DEDI) stock increased significantly by 26% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Dedicare's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Is ROE Calculated?
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 Dedicare is:
28% = kr42m ÷ kr150m (Based on the trailing twelve months to March 2021).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every SEK1 worth of equity, the company was able to earn SEK0.28 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. 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.
A Side By Side comparison of Dedicare's Earnings Growth And 28% ROE
Firstly, we acknowledge that Dedicare has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 11% which is quite remarkable. For this reason, Dedicare's five year net income decline of 12% raises the question as to why the high ROE didn't translate into earnings growth. So, there might be some other aspects that could explain this. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
However, when we compared Dedicare's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 16% in the same period. This is quite worrisome.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Dedicare fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Dedicare Efficiently Re-investing Its Profits?
With a three-year median payout ratio as high as 105%,Dedicare's shrinking earnings don't come as a surprise as the company is paying a dividend which is beyond its means. Paying a dividend higher than reported profits is not a sustainable move. You can see the 4 risks we have identified for Dedicare by visiting our risks dashboard for free on our platform here.
In addition, Dedicare has been paying dividends over a period of nine years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.
Overall, we have mixed feelings about Dedicare. While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Dedicare's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.
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