Is the poor financial outlook causing Domain Holdings Australia Limited (ASX: DHG Stock?

With its stock down 24% in the past three months, it’s easy to overlook Domain Holdings Australia (ASX:DHG). 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. Specifically, we decided to study the ROE of Domain Holdings Australia in this article.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simple terms, it is used to assess the profitability of a company in relation to its equity.

Check out our latest analysis for Domain Holdings Australia

How to calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Domain Holdings Australia is:

3.9% = AU$37 million ÷ AU$927 million (based on trailing 12 months to December 2021).

“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every Australian dollar of share capital it has, the company has made a profit of 0.04 Australian dollars.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective earnings-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. 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.

A side-by-side comparison of Domain Holdings Australia’s earnings growth and ROE of 3.9%

At first glance, there isn’t much to say about Domain Holdings Australia’s ROE. Then, compared to the industry average ROE of 22%, the company’s ROE leaves us even less excited. Therefore, it might not be wrong to say that the 15% drop in net income over five years that Domain Holdings Australia saw was likely the result of lower ROE. We believe there could be other factors at play here as well. For example, the company has a very high payout ratio or faces competitive pressures.

So, as a next step, we benchmarked Domain Holdings Australia’s performance against the industry and were disappointed to find that while the company was cutting profits, the industry was increasing profits at a rate of 10%. during the same period.

ASX: DHG Past Earnings Growth February 23, 2022

Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. Has the market priced in future prospects for DHG? You can find out in our latest infographic research report on intrinsic value.

Does Domain Holdings Australia use its profits efficiently?

With a high LTM (or Trailing Twelve Month) payout ratio of 101% (implying -0.9% of earnings retained), most of Domain Holdings Australia’s earnings are paid out to shareholders, which explains the decline. profits of the company. The company has only a small pool of capital left to reinvest – A vicious circle that does not benefit the company in the long run.

Additionally, Domain Holdings Australia has paid dividends over a four-year period, meaning that the company’s management is instead focused on maintaining its dividend payments regardless of declining profits. Existing analyst estimates suggest the company’s future payout ratio is expected to drop to 64% over the next three years. The fact that the company’s ROE is expected to be 10% over the same period is explained by the drop in the payout ratio.

Summary

Overall, Domain Holdings Australia’s performance is quite disappointing. In particular, its ROE is a huge disappointment, not to mention its lack of proper reinvestment in the business. As a result, its earnings growth was also quite disappointing. 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. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

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.

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