Has Doman Building Materials Group Ltd.'s (TSE:DBM) Impressive Stock Performance Got Anything to Do With Its Fundamentals?
Most readers would already be aware that Doman Building Materials Group's (TSE:DBM) stock increased significantly by 13% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Doman Building Materials Group'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Doman Building Materials Group
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 Doman Building Materials Group is:
12% = CA$70m ÷ CA$597m (Based on the trailing twelve months to September 2023).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.12 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Doman Building Materials Group's Earnings Growth And 12% ROE
To begin with, Doman Building Materials Group seems to have a respectable ROE. Even so, when compared with the average industry ROE of 15%, we aren't very excited. That being the case, the significant five-year 25% net income growth reported by Doman Building Materials Group comes as a pleasant surprise. Therefore, there could be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this certainly also provides some context to the high earnings growth seen by the company.
We then performed a comparison between Doman Building Materials Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 26% in the same 5-year period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is DBM worth today? The intrinsic value infographic in our free research report helps visualize whether DBM is currently mispriced by the market.
Is Doman Building Materials Group Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 57% (implying that it keeps only 43% of profits) for Doman Building Materials Group suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.
Moreover, Doman Building Materials Group is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 62%. As a result, Doman Building Materials Group's ROE is not expected to change by much either, which we inferred from the analyst estimate of 12% for future ROE.
Summary
In total, it does look like Doman Building Materials Group has some positive aspects to its business. Specifically, its respectable ROE which likely led to the considerable growth in earnings. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. 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.
