It's easy to ignore Dynatrace (NYSE:DT), as its stock price is down 19% over the past month. But if you pay close attention, given how the market typically rewards companies with strong financial health, the company's strong financials could mean a higher share price over the long term. You may be wondering if that means something. In this article, we decided to focus on his ROE for Dynatrace.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it receives from its shareholders. In other words, ROE shows the return that each dollar of a shareholder's investment generates.
Check out our latest analysis for Dynatrace.
How is ROE calculated?
of Formula for calculating return on equity teeth:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Dynatrace's ROE is:
10% = USD 197 million ÷ USD 1.9 billion (based on trailing twelve months to December 2023).
“Return” refers to a company's earnings over the past year. That is, for every $1 a shareholder invests, the company generates $0.10 in profit for him.
Why is ROE important for profit growth?
It has already been established that ROE serves as an indicator of how efficiently a company will generate future profits. Now we need to assess how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company's growth potential. Generally speaking, other things being equal, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.
Dynatrace's revenue growth and ROE 10%
First of all, Dynatrace's ROE looks acceptable. Moreover, the company's ROE is in line with the industry average of 13%. This certainly gives some context to the exceptional 61% growth in Dynatrace's net income over the past five years. We think there may be other aspects that are positively impacting the company's earnings growth. For example, the company's management may have made some good strategic decisions, or the company may have a low dividend payout ratio.
Next, if we compare it to the industry's net income growth, we find that Dynatrace's growth is quite high when compared to the industry average growth rate of 16% over the same period, which is great.
The foundations that give a company value have a lot to do with its revenue growth. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. That way, you'll know if the stock is headed for clear blue waters or if a swamp awaits. What is DT worth today? Our free research report's intrinsic value infographic helps you visualize whether DT is currently mispriced in the market.
Is Dynatrace effectively reinvesting its profits?
Given that Dynatrace does not pay dividends to shareholders, we can assume that the company reinvests all of its profits to grow its business.
summary
Overall, I'm very happy with Dynatrace's performance. Specifically, we like that the company reinvests a huge amount of its profits at a high rate of return. Of course, this significantly increased the company's revenue. Having said that, a review of the latest analyst forecasts indicates that the company's future revenue growth is expected to slow. To know more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts 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 using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
