Dexterra Group Inc.'s (TSE:DXT) Dismal Stock Performance Reflects Weak Fundamentals
Dexterra Group (TSE:DXT) has had a rough three months with its share price down 9.7%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. In this article, we decided to focus on Dexterra Group's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Dexterra 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 Dexterra Group is:
9.6% = CA$27m ÷ CA$276m (Based on the trailing twelve months to March 2024).
The 'return' is the yearly profit. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.10 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Dexterra Group's Earnings Growth And 9.6% ROE
On the face of it, Dexterra Group's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.3%. But then again, Dexterra Group's five year net income shrunk at a rate of 22%. Remember, the company's ROE is a bit low to begin with. Therefore, the decline in earnings could also be the result of this.
However, when we compared Dexterra Group's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 14% in the same period. This is quite worrisome.
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. Is Dexterra Group fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Dexterra Group Making Efficient Use Of Its Profits?
Dexterra Group's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 101% (or a retention ratio of -0.8%). With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 3 risks we have identified for Dexterra Group by visiting our risks dashboard for free on our platform here.
Moreover, Dexterra Group has been paying dividends for four years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.
Summary
On the whole, Dexterra Group's performance is quite a big let-down. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.
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