Declining Stock and Solid Fundamentals: Is The Market Wrong About Dr. Martens plc (LON:DOCS)?
It is hard to get excited after looking at Dr. Martens' (LON:DOCS) recent performance, when its stock has declined 36% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Dr. Martens' ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Dr. Martens
How To Calculate Return On Equity?
Return on equity 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 Dr. Martens is:
28% = UK£103m ÷ UK£364m (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.28.
Why Is ROE Important For 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Dr. Martens' Earnings Growth And 28% ROE
Firstly, we acknowledge that Dr. Martens has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 6.1% also doesn't go unnoticed by us. As a result, Dr. Martens' exceptional 28% net income growth seen over the past five years, doesn't come as a surprise.
As a next step, we compared Dr. Martens' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 28% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is DOCS worth today? The intrinsic value infographic in our free research report helps visualize whether DOCS is currently mispriced by the market.
Is Dr. Martens Efficiently Re-investing Its Profits?
Dr. Martens' three-year median payout ratio is a pretty moderate 32%, meaning the company retains 68% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Dr. Martens is reinvesting its earnings efficiently.
While Dr. Martens has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 53% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 21%) over the same period.
Summary
Overall, we are quite pleased with Dr. Martens' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.
