DocCheck (ETR:AJ91) stock is up a remarkable 13% in the last three months. Given that the market rewards strong financials over the long term, we wonder if that is the case in this case. In this article, we decided to focus on DocCheck’s ROE.
ROE or return on equity is a useful tool for assessing how effectively a company can generate returns on the investments it receives from its shareholders. In other words, it shows the company’s success in converting shareholder investments into profits.
Check out our latest analysis for DocCheck
How is ROE calculated?
The Return on equity formula Is:
Return on equity = net profit (from continuing operations) ÷ equity
So based on the above formula, the ROE for DocCheck is:
15% = €5.8 million ÷ €38 million (Based on the last twelve months to June 2023).
The “return” is the annual profit. This means that for every euro of equity the company generated a profit of 0.15 euros.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth, which then gives us an idea of the company’s growth potential. In general, companies with a high return on equity and profit retention, other things being equal, have a higher growth rate than companies that do not have these characteristics.
DocCheck’s earnings growth and 15% ROE
At first glance, DocCheck appears to have a decent ROE. Furthermore, the company’s ROE compares quite well to the industry average of 11%. Presumably for this reason, DocCheck has seen an impressive net income growth of 22% over the last five years. We assume that other factors could also play a role here. For example, the company has a low payout ratio or is managed efficiently.
Next, when comparing with the industry’s net income growth, we found that DocCheck’s growth is quite high compared to the industry average of 18% in the same period, which is great to see.
Earnings growth is an important factor in stock valuation. Next, investors need to determine whether or not expected earnings growth is already built into the stock price. This will give them an idea of whether the stock is headed to clear, blue waters or whether swampy waters await them. If you’re wondering about DocCheck’s valuation, take a look at this measure of the company’s price-to-earnings ratio compared to the industry.
Does DocCheck use its retained earnings effectively?
The high three-year average payout ratio of 55% (meaning only 45% of profits are retained) for DocCheck suggests that the company’s growth hasn’t really been affected despite it distributing the majority of profits to its shareholders.
In addition, DocCheck is committed to continuing to share its profits with shareholders, which we infer from its long history of nine years of dividend distribution.
Overall, we are very satisfied with the performance of DocCheck. Particularly noteworthy is the high ROE, which probably explains the significant earnings growth. However, the company retains a small portion of its profits. This means the company was still able to grow its profits, so it’s not so bad. So far we’ve only had a brief discussion about the company’s earnings growth. For further insights into DocCheck’s past earnings growth, check out this visualization of past earnings, revenue and cash flow.
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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.