Yahoo Finance Duxton Water Limited's (ASX:D2O) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?
Duxton Water (ASX:D2O) has had a rough week with its share price down 2.2%. 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 Duxton Water's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Duxton Water
How Is ROE Calculated?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Duxton Water is:
6.0% = AU$8.7m ÷ AU$144m (Based on the trailing twelve months to December 2020).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.06 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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 Duxton Water's Earnings Growth And 6.0% ROE
On the face of it, Duxton Water's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 9.4% either. However, we we're pleasantly surprised to see that Duxton Water grew its net income at a significant rate of 28% in the last five years. So, there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Duxton Water's growth is quite high when compared to the industry average growth of 8.8% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for D2O? You can find out in our latest intrinsic value infographic research report
Is Duxton Water Efficiently Re-investing Its Profits?
Duxton Water's significant three-year median payout ratio of 87% (where it is retaining only 13% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.
Additionally, Duxton Water has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders.
Conclusion
On the whole, we do feel that Duxton Water has some positive attributes. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Duxton Water and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.
This article by Simply Wall St is general in nature. 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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