DKSH Holding AG (VTX:DKSH) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

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

Mon, Nov 13, 2023, 1:31 AM 4 min read

It is hard to get excited after looking at DKSH Holding's (VTX:DKSH) recent performance, when its stock has declined 17% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on DKSH Holding's ROE.

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.

View our latest analysis for DKSH Holding

How To 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 DKSH Holding is:

12% = CHF209m ÷ CHF1.7b (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. That means that for every CHF1 worth of shareholders' equity, the company generated CHF0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

DKSH Holding's Earnings Growth And 12% ROE

At first glance, DKSH Holding seems to have a decent ROE. Even when compared to the industry average of 13% the company's ROE looks quite decent. Despite this, DKSH Holding's five year net income growth was quite flat over the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 11% over the last few years.

past-earnings-growth — SWX:DKSH Past Earnings Growth November 13th 2023

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about DKSH Holding's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is DKSH Holding Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 69% (implying that the company keeps only 31% of its income) of its business to reinvest into its business), most of DKSH Holding's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, DKSH Holding has been paying dividends over a period of at least ten 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 59%. As a result, DKSH Holding's ROE is not expected to change by much either, which we inferred from the analyst estimate of 13% for future ROE.

Conclusion

On the whole, we do feel that DKSH Holding has some positive attributes. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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.