Deswell Industries (NASDAQ: DSWL) stock rose 21% in the past month. As most know, fundamentals generally guide long-term market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play in the recent one. price movement. In this article, we have decided to focus on the ROE of Deswell Industries.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. Simply put, it is used to assess a company’s profitability against its equity.
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE of Deswell Industries is:
9.6% = US $ 8.2 million Ã· US $ 86 million (based on the last twelve months up to March 2021).
The “return” is the income the business has earned over the past year. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.10.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or âwithholdsâ and its efficiency, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Profit growth for Deswell Industries and 9.6% ROE
When you first watch it, Deswell Industries’ ROE doesn’t look so appealing. A quick follow-up study shows that the company’s ROE also does not compare favorably to the industry average of 14%. Despite this, Deswell Industries has been able to significantly increase its bottom line, at a rate of 22% over the past five years. We think there might be other factors at play here. For example, the business has a low payout ratio or is managed efficiently.
We then compared the net income growth of Deswell Industries with the industry and we are happy to see that the growth number of the company is higher compared to the industry which has a growth rate of 14% at the during the same period.
NasdaqGM: DSWL Past Profit Growth November 20, 2021
Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So you may want check if Deswell Industries is trading on a high P / E or a low P / E, compared to its industry.
Is Deswell Industries using its profits efficiently?
Deswell Industries’ three-year median payout ratio is quite moderate at 37%, which means the company keeps 63% of its revenue. At first glance, the dividend is well hedged and Deswell Industries is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
In addition, Deswell Industries is committed to continuing to share its profits with its shareholders, which we can deduce from its long history of paying dividends for at least ten years.
Overall, we think Deswell Industries certainly has some positive factors to consider. Even despite the low rate of return, the company has shown impressive profit growth by reinvesting heavily in its operations. While we don’t completely reject the business, what we would do is try to determine how risky the business is to make a more informed decision about the business. To know the 4 risks that we have identified for Deswell Industries visit our risk dashboard for free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St does not have any position in the mentioned stocks.
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