Dinkelacker (BST:DWB) has been doing well on the stock market, with its share price increasing by a significant 12% over the past three months. Considering the company's impressive performance, we decided to take a closer look at its financial metrics, as a company's financial health over the long term usually drives market results. In this article, we decided to focus on Dinkelacker's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it receives from its shareholders. More simply, it measures a company's profitability in relation to shareholder equity.
Check out our latest analysis for Dinkelacker.
How do I calculate return on equity?
Return on equity can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, the ROE for Dinkelacker is:
13% = €11 million ÷ €81 million (based on the trailing 12 months to September 2023).
“Return” is the annual profit. One way he conceptualizes this is that for every €1 of shareholders' equity, the company made his €0.13 in profit.
Why is ROE important for profit growth?
So far, we have learned that ROE is a measure of a company's profitability. Depending on how much of these profits a company reinvests or “retains”, and how effectively it does so, we are then able to assess a company's earnings growth potential. Generally, other things being equal, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.
Dinkelacker's earnings growth and ROE of 13%
At first glance, Dinkelacker appears to have a decent ROE. His ROE for the company looks pretty good, especially when compared to his industry average of 4.2%. Nevertheless, Dinkelacker's net income growth over his five years was very low, averaging only 3.4%. This is a bit unexpected for a company with such high profit margins. Such a scenario is more likely to occur when a company pays out a large portion of its earnings as dividends or faces competitive pressures.
We then compare it to the industry's net income growth rate and find that Dinkelacker's growth rate is quite high when compared to the industry average growth rate of 2.8% 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. Doing so will help you determine whether a stock's future is promising or ominous. If you're curious about Dinkelacker's's valuation, check out this gauge of its price-to-earnings ratio compared to its industry.
Is Dinkelacker using its profits efficiently?
With a high three-year median payout ratio of 62% (or retention rate of 38%), most of Dinkelacker's profits are paid out to shareholders. This undoubtedly contributes to the company's low revenue growth rate.
Additionally, Mr. Dinkelacker has been paying dividends for at least 10 years. This means the company's management is determined to pay dividends even if there is little or no growth in profits.
conclusion
Overall, I feel that Dinkelacker's performance was very good. In particular, the high ROE is noteworthy and is considered to be the basis for the significant profit growth. But the company keeps a small portion of its profits. That means the company was able to grow its revenue despite this, so that's not too bad. If the company continues to grow its revenue as it has, it could have a positive impact on the stock price, given how earnings per share affect the stock price over the long term. Remember, the stock price outcome also depends on the underlying risks that the company may face. Therefore, it is important for investors to be aware of the risks involved in the business. You can read about the one risk he identified for Dinkelacker by visiting: risk dashboard It is available for free on this platform.
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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.
