Does DENTSPLY SIRONA Inc.'s (NASDAQ:XRAY) Weak Fundamentals Mean That The Stock Could Move In The Opposite Direction?
Most readers would already know that DENTSPLY SIRONA's (NASDAQ:XRAY) stock increased by 5.1% over the past three months. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company's financials don't look very promising. Particularly, we will be paying attention to DENTSPLY SIRONA's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for DENTSPLY SIRONA
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for DENTSPLY SIRONA is:
3.5% = US$174m ÷ US$4.9b (Based on the trailing twelve months to March 2021).
The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.04 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
A Side By Side comparison of DENTSPLY SIRONA's Earnings Growth And 3.5% ROE
It is quite clear that DENTSPLY SIRONA's ROE is rather low. Even compared to the average industry ROE of 10%, the company's ROE is quite dismal. Therefore, DENTSPLY SIRONA's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.
Next, on comparing with the industry net income growth, we found that DENTSPLY SIRONA's reported growth was lower than the industry growth of 14% in the same period, which is not something we like to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is XRAY worth today? The intrinsic value infographic in our free research report helps visualize whether XRAY is currently mispriced by the market.
Is DENTSPLY SIRONA Efficiently Re-investing Its Profits?
DENTSPLY SIRONA has a high LTM (or last twelve month) payout ratio of 50% (or a retention ratio of 50%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.
Moreover, DENTSPLY SIRONA has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 11% over the next three years. The fact that the company's ROE is expected to rise to 12% over the same period is explained by the drop in the payout ratio.
Summary
In total, we would have a hard think before deciding on any investment action concerning DENTSPLY SIRONA. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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