DXN Holdings Bhd. (KLSE:DXN) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?
With its stock down 7.2% over the past three months, it is easy to disregard DXN Holdings Bhd (KLSE:DXN). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to DXN Holdings Bhd's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for DXN Holdings Bhd
How Do You Calculate Return On Equity?
ROE 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 DXN Holdings Bhd is:
23% = RM290m ÷ RM1.3b (Based on the trailing twelve months to August 2023).
The 'return' is the yearly profit. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.23 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.
DXN Holdings Bhd's Earnings Growth And 23% ROE
At first glance, DXN Holdings Bhd seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 8.7%. Probably as a result of this, DXN Holdings Bhd was able to see a decent growth of 5.8% over the last five years.
Next, on comparing DXN Holdings Bhd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 6.6% over the last few years.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for DXN? You can find out in our latest intrinsic value infographic research report.
Is DXN Holdings Bhd Efficiently Re-investing Its Profits?
DXN Holdings Bhd's high three-year median payout ratio of 304% suggests that the company is paying out more to its shareholders than what it is making. Still the company's earnings have grown respectably. Although, the high payout ratio is certainly something we would keep an eye on if the company is not able to keep up its growth, or if business deteriorates. You can see the 2 risks we have identified for DXN Holdings Bhd by visiting our risks dashboard for free on our platform here.
Our latest analyst data shows that the future payout ratio of the company is expected to drop to 43% over the next three years. The fact that the company's ROE is expected to rise to 28% over the same period is explained by the drop in the payout ratio.
Summary
In total, it does look like DXN Holdings Bhd has some positive aspects to its business. Especially the growth in earnings which was backed by an impressive ROE. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.
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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.
