Declining Stock and Decent Financials: Is The Market Wrong About Data#3 Limited (ASX:DTL)?
With its stock down 16% over the past three months, it is easy to disregard Data#3 (ASX:DTL). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Data#3's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Data#3
How Do You 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 Data#3 is:
52% = AU$28m ÷ AU$55m (Based on the trailing twelve months to December 2021).
The 'return' is the yearly profit. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.52.
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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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 Data#3's Earnings Growth And 52% ROE
First thing first, we like that Data#3 has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 9.4% which is quite remarkable. This likely paved the way for the modest 16% net income growth seen by Data#3 over the past five years. growth
Next, on comparing with the industry net income growth, we found that Data#3's growth is quite high when compared to the industry average growth of 4.3% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. 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 DTL fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Data#3 Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 91% (or a retention ratio of 9.3%) for Data#3 suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Moreover, Data#3 is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 90%. Accordingly, forecasts suggest that Data#3's future ROE will be 55% which is again, similar to the current ROE.
On the whole, we do feel that Data#3 has some positive attributes. Namely, its high earnings growth, which was likely due to its high ROE. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining hardly any of its profits. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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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