Dis-Chem Pharmacies Limited's (JSE:DCP) Stock Has Fared Decently: Is the Market Following Strong Financials?

Most readers would already know that Dis-Chem Pharmacies' (JSE:DCP) stock increased by 9.6% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Dis-Chem Pharmacies' ROE.

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.

See our latest analysis for Dis-Chem Pharmacies

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 Dis-Chem Pharmacies is:

23% = R1.0b ÷ R4.5b (Based on the trailing twelve months to February 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every ZAR1 worth of equity, the company was able to earn ZAR0.23 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. 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. 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.

Dis-Chem Pharmacies' Earnings Growth And 23% ROE

To start with, Dis-Chem Pharmacies' ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 21%. This probably goes some way in explaining Dis-Chem Pharmacies' moderate 12% growth over the past five years amongst other factors.

As a next step, we compared Dis-Chem Pharmacies' 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 12% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Dis-Chem Pharmacies''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Dis-Chem Pharmacies Using Its Retained Earnings Effectively?

Dis-Chem Pharmacies has a three-year median payout ratio of 40%, which implies that it retains the remaining 60% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Dis-Chem Pharmacies has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 40% of its profits over the next three years. As a result, Dis-Chem Pharmacies' ROE is not expected to change by much either, which we inferred from the analyst estimate of 25% for future ROE.

Conclusion

On the whole, we feel that Dis-Chem Pharmacies' performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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. 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.