Will Weakness in DigitalBridge Group, Inc.'s (NYSE:DBRG) Stock Prove Temporary Given Strong Fundamentals?
With its stock down 7.9% over the past month, it is easy to disregard DigitalBridge Group (NYSE:DBRG). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study DigitalBridge Group's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for DigitalBridge Group
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for DigitalBridge Group is:
15% = US$366m ÷ US$2.5b (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.15 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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.
DigitalBridge Group's Earnings Growth And 15% ROE
To begin with, DigitalBridge Group seems to have a respectable ROE. Especially when compared to the industry average of 6.5% the company's ROE looks pretty impressive. This certainly adds some context to DigitalBridge Group's exceptional 46% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing with the industry net income growth, we found that DigitalBridge Group's growth is quite high when compared to the industry average growth of 27% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about DigitalBridge Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is DigitalBridge Group Using Its Retained Earnings Effectively?
DigitalBridge Group has a really low LTM (or last twelve month) payout ratio of 1.4%, meaning that it has the remaining 99% left over to reinvest into its business. So it looks like DigitalBridge Group is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Moreover, DigitalBridge Group is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 1.9% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to -3.7% over the same period.
Summary
In total, we are pretty happy with DigitalBridge Group's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.
