Is The Market Rewarding Dr. Martens plc (LON:DOCS) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

editorial-team@simplywallst.com (Simply Wall St)

Tue, May 6, 2025, 11:19 PM 4 min read

It is hard to get excited after looking at Dr. Martens' (LON:DOCS) recent performance, when its stock has declined 24% over the past three months. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Dr. Martens' 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.

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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 Dr. Martens is:

8.8% = UK£29m ÷ UK£335m (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.09 in profit.

Check out our latest analysis for Dr. Martens

What Has ROE Got To Do With 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. 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.

A Side By Side comparison of Dr. Martens' Earnings Growth And 8.8% ROE

When you first look at it, Dr. Martens' ROE doesn't look that attractive. However, its ROE is similar to the industry average of 9.4%, so we won't completely dismiss the company. On the other hand, Dr. Martens reported a fairly low 2.1% net income growth over the past five years. Remember, the company's ROE is not particularly great to begin with. So this could also be one of the reasons behind the company's low growth in earnings.

As a next step, we compared Dr. Martens' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 16% in the same period.

past-earnings-growth — LSE:DOCS Past Earnings Growth May 7th 2025

Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for DOCS? You can find out in our latest intrinsic value infographic research report.

Is Dr. Martens Making Efficient Use Of Its Profits?

Despite having a normal three-year median payout ratio of 38% (or a retention ratio of 62% over the past three years, Dr. Martens has seen very little growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Dr. Martens has been paying dividends over a period of three years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. 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 36%. However, Dr. Martens' ROE is predicted to rise to 14% despite there being no anticipated change in its payout ratio.

Summary

Overall, we have mixed feelings about Dr. Martens. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.