Will Weakness in Digital Turbine, Inc.'s (NASDAQ:APPS) Stock Prove Temporary Given Strong Fundamentals?

By
Simply Wall St
Published
December 13, 2021
NasdaqCM:APPS
Source: Shutterstock

It is hard to get excited after looking at Digital Turbine's (NASDAQ:APPS) recent performance, when its stock has declined 24% over the past month. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Digital Turbine's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Digital Turbine

How Do You 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 Digital Turbine is:

11% = US$53m ÷ US$488m (Based on the trailing twelve months to September 2021).

The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.11 in profit.

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.

Digital Turbine's Earnings Growth And 11% ROE

At first glance, Digital Turbine seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 11%. This certainly adds some context to Digital Turbine's exceptional 74% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Digital Turbine's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 19%.

past-earnings-growth
NasdaqCM:APPS Past Earnings Growth December 13th 2021

Earnings growth is a huge factor in stock valuation. 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 Digital Turbine fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Digital Turbine Using Its Retained Earnings Effectively?

Digital Turbine doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

On the whole, we feel that Digital Turbine's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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