It is hard to get excited after looking at Datacolor’s (VTX:DCN) recent performance, when its stock has declined 17% over the past three months. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Datacolor’s ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Datacolor
How Do You Calculate Return On Equity?
Return on equity 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 Datacolor is:
7.9% = US$3.6m ÷ US$45m (Based on the trailing twelve months to September 2019).
The ‘return’ is the amount earned after tax over the last twelve months. Another way to think of that is that for every CHF1 worth of equity, the company was able to earn CHF0.08 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
Datacolor’s Earnings Growth And 7.9% ROE
To start with, Datacolor’s ROE looks acceptable. Even so, when compared with the average industry ROE of 12%, we aren’t very excited. Further, Datacolor’s five year net income growth of 1.1% is more or less flat. Not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. Hence there might be some other aspects that are causing the flat growth in earnings. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitve pressures.
Next, on comparing with the industry net income growth, we found that Datacolor’s reported growth was lower than the industry growth of 8.8% in the same period, which is not something we like to see.
SWX:DCN Past Earnings Growth April 17th 2020
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. What is DCN worth today? The intrinsic value infographic in our free research report helps visualize whether DCN is currently mispriced by the market.
Is Datacolor Efficiently Re-investing Its Profits?
In spite of a normal three-year median payout ratio of 45% (or a retention ratio of 55%), Datacolor hasn’t seen much growth in its earnings. So there could be some other explanation in that regard. For instance, the company’s business may be deteriorating.
Moreover, Datacolor has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
Conclusion
Overall, we feel that Datacolor certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that’s preventing growth.
So far, we’ve only made a quick discussion around the company’s earnings growth. To gain further insights into Datacolor’s past profit growth, check out this visualization of past earnings, revenue and cash flows.
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