Dollar Industries Limited’s (NSE:DOLLAR) Stock Is Going Strong: Is the Market Following Fundamentals?

Dollar Industries (NSE:DOLLAR) has had a great run on the share market with its stock up by a significant 23% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Dollar Industries’ ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Put another way, it reveals the company’s success at turning shareholder investments into profits.

See our latest analysis for Dollar Industries

How Is ROE Calculated?

ROE 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 Dollar Industries is:

23% = ₹1.5b ÷ ₹6.7b (Based on the trailing twelve months to June 2022).

The ‘return’ is the income the business earned over the last year. One way to conceptualize this is that for each ₹1 of shareholders’ capital it has, the company made ₹0.23 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Dollar Industries’ Earnings Growth And 23% ROE

To begin with, Dollar Industries seems to have a respectable ROE. Especially when compared to the industry average of 12% the company’s ROE looks pretty impressive. This certainly adds some context to Dollar Industries’ decent 19% net income growth seen over the past five years.

Next, on comparing Dollar Industries’ net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 17% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One 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 prospects. So, you may want to check if Dollar Industries is trading on a high P/E or a low P/E, relative to its industry.

Is Dollar Industries Using Its Retained Earnings Effectively?

In Dollar Industries’ case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 15% (or a retention ratio of 85%), which suggests that the company is investing most of its profits to grow its business.

Besides, Dollar Industries has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, we are pretty happy with Dollar Industries’ performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for Dollar Industries.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.