Does Dolby Laboratories, Inc.’s (NYSE:DLB) recent performance have anything to do with its financial health?

Most readers will already know that shares of Dolby Laboratories (NYSE:DLB) are up 5.0% over the past three months. As most know, long-term fundamentals have a strong correlation with market price movements, so we decided to take a look at key business financial indicators today to see if they have a role to play. play in the recent price movement. Specifically, we decided to study the ROE of Dolby Laboratories 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 other words, it reveals the company’s success in turning shareholders’ investments into profits.

See our latest analysis for Dolby Laboratories

How to calculate return on equity?

ROE can be calculated using the formula:

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

So, based on the above formula, the ROE for Dolby Laboratories is:

8.3% = $215 million ÷ $2.6 billion (based on trailing 12 months to April 2022).

“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.08.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Dolby Laboratories earnings growth and ROE of 8.3%

At first glance, Dolby Laboratories’ ROE isn’t much to tell. A quick closer look shows that the company’s ROE also doesn’t compare favorably to the industry average of 12%. However, the moderate 16% net income growth observed by Dolby Laboratories over the past five years is definitely positive. Thus, the company’s earnings growth could likely have been caused by other variables. Such as – high revenue retention or effective management in place.

We then compared Dolby Laboratories’ net income growth with the industry and found that the company’s growth figure is below the industry average growth rate of 27% over the same period, which which is a little worrying.

NYSE: DLB Past Earnings Growth June 2, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. Has the market priced in DLB’s future prospects? You can find out in our latest infographic research report on intrinsic value.

Does Dolby Laboratories effectively reinvest its profits?

Dolby Laboratories has a healthy combination of a moderate three-year median payout ratio of 34% (or a retention rate of 66%) and respectable earnings growth, as we saw above, this which means that the company has made efficient use of its profits.

Additionally, Dolby Laboratories is committed to continuing to share its profits with shareholders, which we infer from its eight-year long history of paying dividends. Existing analyst estimates suggest the company’s future payout ratio is expected to drop to 24% over the next three years. Thus, the expected decline in the payout rate explains the expected increase in the company’s ROE to 17%, over the same period.

Conclusion

All in all, it seems that Dolby Laboratories has positive aspects for its business. In other words, decent earnings growth supported by a high rate of reinvestment. However, we believe that this earnings growth could have been higher if the company were to improve the low ROE rate. Especially considering how the company reinvests a huge portion of its profits. That said, the latest forecasts from industry analysts show that the company’s earnings are set to accelerate. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page 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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