It's hard to get excited about Diatreme Resources' (ASX:DRX) recent performance, with its share price down 13% in the past three months. However, stock prices are usually driven by a company's long-term financial performance, which in this case looks very promising. Specifically, we decided to study Diatreme Resources' ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder as it indicates how effectively their capital is being reinvested. In other words, this reveals that the company has been successful in turning shareholder investments into profits.
See our latest analysis for Diatreme Resources.
How is ROE calculated?
of ROE calculation formula teeth:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Ditreme Resources' ROE is:
16% = AUD 10 million ÷ AUD 64 million (based on the trailing twelve months to December 2023).
“Return” refers to a company's earnings over the past year. That means for every AU$1 of shareholders' equity, the company generated AU$0.16 of his profit.
What relationship does ROE have with profit growth?
So far, we have learned that ROE measures how efficiently a company is generating its profits. We are then able to evaluate a company's future ability to generate profits based on how much of its profits it chooses to reinvest or “retain”. Generally, other things being equal, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.
Diatreme Resources' earnings growth and ROE 16%
Firstly, Ditreme Resources appears to have a respectable ROE. His ROE for the company looks pretty good, especially when compared to the industry average of 10%. This certainly gives some context to the exceptional 64% growth in Diatreme Resources' net income over the past five years. We think there may be other aspects that are positively impacting the company's earnings growth. For example, a company with a low dividend payout ratio or a company with efficient management.
We then compare it to the industry's net income growth rate, and we see that Ditreme Resources has a very high growth rate when compared to the industry average growth rate of 21% over the same period, which is great.
Earnings growth is an important metric to consider when evaluating a stock. It's important for investors to know whether the market is pricing in a company's expected earnings growth (or decline). That way, you'll know if the stock is headed for clear blue waters or if a swamp awaits. If you're wondering about Diatreme Resources's valuation, check out this gauge of its price-to-earnings ratio compared to its industry.
Is Diatreme Resources utilizing its profits efficiently?
Diatreme Resources does not pay dividends to shareholders. This means that the company reinvests all of its profits back into the business. This is likely what is driving the high earnings growth rate discussed above.
summary
Overall, we're pretty happy with Diatreme Resources' performance. Specifically, we like that the company reinvests a huge amount of its profits at a high rate of return. Of course, this significantly increased the company's revenue. If the company continues to grow its revenue as it has, this could have a positive impact on the stock price, given how earnings per share affect the stock price over the long term. Don't forget that business risk is also one of the factors that affect stock prices. Therefore, this is also an important area that investors need to pay attention to before making decisions about the business. The risks dashboard shows the three risks he has identified regarding Ditreme Resources.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
