Should the weakness of Dewhurst plc (LON: DWHT) stock be viewed as a sign that the market will correct its stock price in the face of decent financial data?

When you look at Dewhurst’s (LON: DWHT) recent performance, it’s hard to rejoice when its stock is down 12% over the past month. The company’s fundamentals look pretty decent, however, and the long-term financial data is usually aligned with future market price movements. We’re going to be paying particular attention to the Dewhurst ROE today.

Return on Equity, or ROE, is an important metric for assessing how efficiently a company’s management is using the company’s capital. In short, ROE shows the profit each dollar generates on its equity investment.

Check out our latest analysis for Dewhurst

How do you calculate the return on equity?

The ROE can be calculated using the formula:

Return on Equity = Net Income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for Dewhurst is:

11% = UK £ 5.1m ÷ UK £ 47m (based on the last 12 months through March 2021).

The “return” is the income that the company has earned over the past year. That means the company made a profit of £ 0.11 for every £ 1 worth of equity.

What is the Relationship Between ROE and Earnings Growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “withholds” and how effectively this is done, we can then estimate a company’s earnings growth potential. Assuming everything else stays the same, the higher the rate of growth of a company compared to companies that do not necessarily have these characteristics, the higher the ROE and retained earnings.

A side-by-side comparison of Dewhurst’s earnings growth and 11% ROE

To begin with, Dewhurst’s ROE looks acceptable. In addition, the company’s ROE is equivalent to the industry average of 11%. Even so, Dewhurst’s five-year net income growth has been fairly flat over the past five years. So there could be some other aspects that could potentially prevent the company from growing. For example, it may be that the company has a high payout ratio or the company has poorly allocated capital, for example.

The story goes on

As a next step, we compared Dewhurst’s net income growth to that of the industry and found that the industry experienced an average growth of 5.5% over the same period.

The basis for increasing the value of a company is largely linked to its earnings development. It is important for an investor to know if the market has priced in the company’s expected earnings growth (or decline). That way, they can determine whether the future of the stock looks promising or ominous. Is Dewhurst fairly valued compared to other companies? These 3 benchmarks can help you make a decision.

Is Dewhurst Reinvesting Its Profits Efficiently?

Although Dewhurst has had a normal 3-year median payout ratio of 31% over the past three years (meaning the company keeps 69% of its earnings), as we saw above, Dewhurst has seen negligible earnings growth. Hence there may be several other reasons to explain the shortcoming in this regard. For example, business could be in decline.

Additionally, Dewhurst has paid dividends over a period of at least a decade, which means the company’s management is determined to pay dividends, even if it means little or no earnings growth.

summary

Overall, it looks like Dewhurst has some positives in its business. However, we are disappointed that despite a high ROE and a high reinvestment rate, there is no earnings growth. We believe there could be some external factors that could negatively affect the business. So far we’ve only had a brief discussion about the company’s earnings growth. So it can be worth checking out for free detailed graphic Dewhurst’s earnings to date, as well as revenue and cash flows, to get a deeper insight into the company’s performance.

This article from Simply Wall St is of a general nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.

Do you have any feedback on this article? Concerned about the content? Get in touch directly with us. Alternatively, send an email to the editorial team (at) simplywallst.com.