In This Article:
Daldrup & Söhne's (ETR:4DS) stock is up by a considerable 11% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Daldrup & Söhne'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. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Daldrup & Söhne
How To 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 Daldrup & Söhne is:
9.4% = €2.2m ÷ €23m (Based on the trailing twelve months to June 2024).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.09 in profit.
Why Is ROE Important For 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.
A Side By Side comparison of Daldrup & Söhne's Earnings Growth And 9.4% ROE
To start with, Daldrup & Söhne's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 10%. This probably goes some way in explaining Daldrup & Söhne's significant 76% net income growth over the past five years amongst other factors. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Daldrup & Söhne's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 36%.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 4DS worth today? The intrinsic value infographic in our free research report helps visualize whether 4DS is currently mispriced by the market.