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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. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Dr. Martens' ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Dr. Martens
How Is ROE Calculated?
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 Dr. Martens is:
19% = UK£69m ÷ UK£368m (Based on the trailing twelve months to March 2024).
The 'return' is the yearly profit. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.19 in profit.
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.
Dr. Martens' Earnings Growth And 19% ROE
At first glance, Dr. Martens seems to have a decent ROE. On comparing with the average industry ROE of 12% the company's ROE looks pretty remarkable. This probably laid the ground for Dr. Martens' moderate 18% net income growth seen over the past five years.
Next, on comparing Dr. Martens' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 16% over the last few years.
Earnings growth is an important metric to consider when valuing a stock. 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. Is DOCS fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Dr. Martens Making Efficient Use Of Its Profits?
With a three-year median payout ratio of 35% (implying that the company retains 65% of its profits), it seems that Dr. Martens is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.