Yahoo Finance Are Robust Financials Driving The Recent Rally In Dis-Chem Pharmacies Limited's (JSE:DCP) Stock?
Dis-Chem Pharmacies' (JSE:DCP) stock is up by a considerable 11% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Dis-Chem Pharmacies' 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Dis-Chem Pharmacies
How Do You 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 Dis-Chem Pharmacies is:
22% = R923m ÷ R4.2b (Based on the trailing twelve months to August 2023).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every ZAR1 of its shareholder's investments, the company generates a profit of ZAR0.22.
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. 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.
Dis-Chem Pharmacies' Earnings Growth And 22% ROE
To begin with, Dis-Chem Pharmacies seems to have a respectable ROE. On comparing with the average industry ROE of 18% the company's ROE looks pretty remarkable. This certainly adds some context to Dis-Chem Pharmacies' decent 11% net income growth seen over the past five years.
Next, on comparing Dis-Chem Pharmacies' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 12% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Dis-Chem Pharmacies''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Dis-Chem Pharmacies Using Its Retained Earnings Effectively?
With a three-year median payout ratio of 40% (implying that the company retains 60% of its profits), it seems that Dis-Chem Pharmacies is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
Besides, Dis-Chem Pharmacies has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders. 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 42%. Accordingly, forecasts suggest that Dis-Chem Pharmacies' future ROE will be 26% which is again, similar to the current ROE.
Summary
On the whole, we feel that Dis-Chem Pharmacies' performance has been quite good. 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, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.
