DRDGOLD Limited's (NYSE:DRD) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?
With its stock down 8.7% over the past month, it is easy to disregard DRDGOLD (NYSE:DRD). 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 DRDGOLD's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for DRDGOLD
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 DRDGOLD is:
30% = R1.4b ÷ R4.8b (Based on the trailing twelve months to June 2021).
The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.30.
Why Is ROE Important For Earnings Growth?
So far, we've 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 about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
DRDGOLD's Earnings Growth And 30% ROE
First thing first, we like that DRDGOLD has an impressive ROE. Secondly, even when compared to the industry average of 20% the company's ROE is quite impressive. As a result, DRDGOLD's exceptional 73% net income growth seen over the past five years, doesn't come as a surprise.
Next, on comparing with the industry net income growth, we found that DRDGOLD's growth is quite high when compared to the industry average growth of 15% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about DRDGOLD's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is DRDGOLD Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 68% (implying that it keeps only 32% of profits) for DRDGOLD suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.
Additionally, DRDGOLD has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.
Summary
In total, we are pretty happy with DRDGOLD's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. 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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into DRDGOLD's past profit growth, check out this visualization of past earnings, revenue and cash flows.
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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.
