DL Holdings Group Limited (HKG: 1709) shares have experienced strong momentum: does this require further study of its financial outlook?
Most readers already know that DL Holdings Group (HKG: 1709) stock has risen significantly by 17% over the past month. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in recent price movements. . In particular, we will pay particular attention to the ROE of DL Holdings Group today.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
See our latest analysis for DL Holdings Group
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE for DL Holdings Group is:
19% = HK $ 62 million ÷ HK $ 332 million (based on the last twelve months up to September 2020).
The “return” is the annual profit. One way to conceptualize this is that for every Hong Kong dollar of equity capital it has, the company made a profit of 0.19 Hong Kong dollars.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the business is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the business. Generally speaking, all other things being equal, companies with a high return on equity and profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of DL Holdings Group’s 19% profit growth and ROE
For starters, DL Holdings Group’s ROE seems acceptable. When compared to the industry’s average ROE of 6.4%, the company’s ROE looks quite remarkable. As you might expect, the 21% drop in net income reported by DL Holdings Group is a bit of a surprise. Therefore, there could be other aspects that could explain this. For example, the company pays out a large portion of its profits as dividends or faces competitive pressures.
Moreover, even compared to the industry, which slashed profits at a rate of 4.9% over the same period, we found DL Holdings Group’s performance to be quite disappointing, as it suggests that the The company has reduced its profits at a faster rate than the industry.
Profit growth is an important metric to consider when valuing a stock. The investor should try to determine whether the expected growth or decline in earnings, whatever the case, is taken into account. This then helps them determine whether the action is set for a bright or gloomy 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 might want to check if DL Holdings Group is trading high P / E or low P / E, relative to its industry.
Is DL Holdings Group Efficiently Using Retained Earnings?
Despite a normal three-year median payout rate of 43% (or a retention rate of 57%), the fact that DL Holdings Group profits have declined is quite puzzling. It seems that there may be other reasons for the lack in this regard. For example, the business could be in decline.
Additionally, DL Holdings Group only recently started paying a dividend, so management likely decided that shareholders preferred dividends even though profits have declined.
Overall, we believe DL Holdings Group has positive attributes. Still, the low profit growth is a bit of a concern, especially since the company has a high rate of return and reinvests a huge chunk of its profits. At first glance, there could be other factors, which do not necessarily control the business, which are preventing growth. While we weren’t going to dismiss the business completely, what we would do is try to figure out how risky the business is to make a more informed decision around the business. You can see the 3 risks we have identified for DL Holdings Group by visiting our risk dashboard for free on our platform here.
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