Dometic Group AB (publ) (STO:DOM) Stocks are down: are bad fundamentals the cause?
It’s hard to get excited after looking at the recent performance of Dometic Group (STO:DOM), as its stock is down 24% in the past three months. Since stock prices are usually influenced by a company’s long-term fundamentals, which in this case seem quite weak, we decided to study the company’s key financial indicators. In this article, we have decided to focus on the ROE of the Dometic Group.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simple terms, it is used to assess the profitability of a company in relation to its equity.
Check out our latest analysis for the Dometic Group
How is ROE calculated?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Dometic Group is:
7.2% = 1.7 billion kr ÷ 24 billion kr (based on the last twelve months to March 2022).
“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every SEK1 of share capital it has, the company has made a profit of 0.07 SEK.
Why is ROE important for earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Dometic Group profit growth and ROE of 7.2%
At first glance, Dometic Group’s ROE does not look so appealing. Yet further investigation shows that the company’s ROE is similar to the industry average of 8.6%. That said, the Dometic Group’s five-year net income decline rate was 6.2%. Remember that the company’s ROE is a bit low to start with. Therefore, this partly explains the drop in income.
Moreover, even compared to the industry, which has reduced its profits at a rate of 4.6% over the same period, we have found that the performance of the Dometic Group is quite disappointing, as it suggests that the company reduced its profits at a faster pace. than industry.
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the action is placed for a bright or bleak future. Is the Dometic group correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does the Dometic Group effectively reinvest its profits?
The Dometic Group’s decline in profits is not surprising given that the company spends the bulk of its profits on paying dividends, judging by its three-year median payout ratio of 51% (or a 49% retention). With very little left to reinvest in the business, earnings growth is far from likely. You can see the 4 risks we have identified for the Dometic Group by visiting our risk dashboard for free on our platform here.
Additionally, the Dometic Group has paid dividends over a five-year period, suggesting that maintaining the payment of dividends is preferred by management, even if profits are down. After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to drop to 39% over the next three years. The fact that the company’s ROE should increase to 10.0% over the same period is explained by the drop in the payout ratio.
Overall, we would be extremely cautious before making any decision on Dometic Group. Due to its low ROE and lack of reinvestment in the business, the company experienced a disappointing earnings growth rate. That said, we studied the latest analyst forecasts and found that while the company has cut earnings in the past, analysts expect earnings to increase in the future. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.