Most readers would already be aware that Dustin Group's (STO:DUST) stock increased significantly by 10% over the past month. 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 Dustin Group's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How To Calculate Return On Equity?
ROE 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 Dustin Group is:
11% = kr277m ÷ kr2.5b (Based on the trailing twelve months to August 2020).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each SEK1 of shareholders' capital it has, the company made SEK0.11 in profit.
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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Dustin Group's Earnings Growth And 11% ROE
To start with, Dustin Group's ROE looks acceptable. Even when compared to the industry average of 12% the company's ROE looks quite decent. This certainly adds some context to Dustin Group's moderate 13% net income growth seen over the past five years.
As a next step, we compared Dustin Group's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 51% in the same period.
Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for DUST? You can find out in our latest intrinsic value infographic research report.
Is Dustin Group Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 75% (or a retention ratio of 25%) for Dustin Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Moreover, Dustin Group is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 63% of its profits over the next three years. Still, forecasts suggest that Dustin Group's future ROE will rise to 17% even though the the company's payout ratio is not expected to change by much.
On the whole, we do feel that Dustin Group has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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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