With its stock down 22% over the past three months, it is easy to disregard Dewhurst Group (LON:DWHT). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Dewhurst Group's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
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 Dewhurst Group is:
13% = UK£7.6m ÷ UK£58m (Based on the trailing twelve months to March 2022).
The 'return' is the amount earned after tax over the last twelve months. That means that for every £1 worth of shareholders' equity, the company generated £0.13 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. 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 Dewhurst Group's Earnings Growth And 13% ROE
At first glance, Dewhurst Group seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 12%. This probably goes some way in explaining Dewhurst Group's moderate 11% growth over the past five years amongst other factors.
We then performed a comparison between Dewhurst Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 11% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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 DWHT fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Dewhurst Group Efficiently Re-investing Its Profits?
In Dewhurst Group's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 25% (or a retention ratio of 75%), which suggests that the company is investing most of its profits to grow its business.
Besides, Dewhurst Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.
In total, we are pretty happy with Dewhurst Group's performance. 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard will have the 1 risk we have identified for Dewhurst Group.
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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.
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