Yahoo Finance Where Downer EDI Limited’s (ASX:DOW) Earnings Growth Stands Against Its Industry
After looking at Downer EDI Limited’s (ASX:DOW) latest earnings update (30 June 2018), I found it helpful to revisit the company’s performance in the past couple of years and compare this against the latest numbers. As a long-term investor I tend to focus on earnings trend, rather than a single number at one point in time. Also, comparing it against an industry benchmark to understand whether it outperformed, or is simply riding an industry wave, is an important aspect. In this article I briefly touch on my key findings.
See our latest analysis for Downer EDI
Despite a decline, did DOW underperform the long-term trend and the industry?
DOW’s trailing twelve-month earnings (from 30 June 2018) of AU$63.4m has more than halved from AU$172.9m in the prior year.
Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of -0.2%, indicating the rate at which DOW is growing has slowed down. Why is this? Well, let’s take a look at what’s going on with margins and whether the rest of the industry is feeling the heat.
Revenue growth over the last few years, has been positive, yet earnings growth has been declining. This suggest that Downer EDI has been growing expenses, which is hurting margins and earnings, and is not a sustainable practice.
Looking at growth from a sector-level, the Australian commercial services industry has been growing its average earnings by double-digit 46.7% over the past year, and a less exciting 9.2% over the last five years. This growth is a median of profitable companies of 13 Commercial Services companies in AU including BSA, Wellcom Group and SG Fleet Group. This suggests that whatever uplift the industry is benefiting from, Downer EDI has not been able to reap as much as its average peer.
In terms of returns from investment, Downer EDI has fallen short of achieving a 20% return on equity (ROE), recording 2.2% instead. Furthermore, its return on assets (ROA) of 1.9% is below the AU Commercial Services industry of 8.2%, indicating Downer EDI’s are utilized less efficiently. And finally, its return on capital (ROC), which also accounts for Downer EDI’s debt level, has declined over the past 3 years from 11.7% to 6.8%. This correlates with an increase in debt holding, with debt-to-equity ratio rising from 39.0% to 47.9% over the past 5 years.
What does this mean?
Though Downer EDI’s past data is helpful, it is only one aspect of my investment thesis. Usually companies that experience a drawn out period of reduction in earnings are undergoing some sort of reinvestment phase in order to keep up with the recent industry expansion and disruption. I recommend you continue to research Downer EDI to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for DOW’s future growth? Take a look at our free research report of analyst consensus for DOW’s outlook.
Financial Health: Are DOW’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2018. This may not be consistent with full year annual report figures.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
