Will the weakness in Doxa AB (publ) (STO:DOXA) shares prove temporary given the strong fundamentals?
It’s hard to get excited after watching the recent performance of Doxa (STO:DOXA), as its stock is down 23% in the past three months. However, a closer look at his healthy finances might make you think again. Since fundamentals generally determine long-term market outcomes, the company is worth looking into. In this article, we decided to focus on the ROE of Doxa.
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 Doxa
How to calculate return on equity?
the return on equity formula East:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Doxa is:
8.8% = 76 million kr ÷ 870 million kr (based on the last twelve months to December 2021).
“Yield” is the income the business has earned over the past year. Another way to think about this is that for every 1 SEK worth of equity, the company was able to make a profit of 0.09 SEK.
Why is ROE important for earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. 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.
Doxa earnings growth and ROE of 8.8%
For starters, Doxa seems to have a respectable ROE. Even when compared to the industry average of 9.4%, the company’s ROE looks pretty decent. This certainly adds some context to Doxa’s moderate 19% net income growth seen over the past five years.
Then, comparing Doxa’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 21% over the same period.
Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. 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. Thus, you might want to check whether Doxa is trading on a high P/E or on a low P/E, relative to its industry.
Does Doxa use its profits effectively?
Doxa does not pay any dividends, which means that all of its profits are reinvested in the company, which explains the company’s good earnings growth.
All in all, we’re pretty happy with Doxa’s performance. In particular, it is good to see that the company is investing heavily in its business, and together with a high rate of return, this has led to significant growth in its profits. If the company continues to increase its earnings as it has, it could have a positive impact on its share price given how earnings per share influence prices over the long term. Not to mention that stock price results also depend on the potential risks that a company may face. It is therefore important for investors to be aware of the risks associated with the business. To learn about the 3 risks we have identified for Doxa, visit our risk dashboard for free.
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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.