Yahoo Finance DXN Holdings Bhd. (KLSE:DXN) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?
DXN Holdings Bhd (KLSE:DXN) has had a rough month with its share price down 5.2%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to DXN Holdings Bhd's ROE today.
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 DXN Holdings Bhd
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 DXN Holdings Bhd is:
24% = RM324m ÷ RM1.4b (Based on the trailing twelve months to February 2024).
The 'return' is the yearly profit. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.24 in profit.
What Has ROE Got To Do With 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. 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.
A Side By Side comparison of DXN Holdings Bhd's Earnings Growth And 24% ROE
To begin with, DXN Holdings Bhd has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 10% which is quite remarkable. This probably laid the groundwork for DXN Holdings Bhd's moderate 6.7% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that DXN Holdings Bhd's reported growth was lower than the industry growth of 8.4% over the last few years, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is DXN fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is DXN Holdings Bhd Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 51% (or a retention ratio of 49%) for DXN Holdings Bhd suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
While DXN Holdings Bhd has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 44%. Accordingly, forecasts suggest that DXN Holdings Bhd's future ROE will be 26% which is again, similar to the current ROE.
Conclusion
On the whole, we do feel that DXN Holdings Bhd 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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.
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