Dogness (International) (NASDAQ: DOGZ) shares have risen 133% in the past three months. But the company’s key financial metrics appear to differ across the board, leading us to question whether the current momentum in the company’s stock price can be sustained. In particular, we will pay special attention to the ROE of Dogness (International) today.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
See our latest review for Dogness (International)
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for Dogness (International) is:
2.0% = US $ 1.3 million Ã· US $ 65 million (based on the last twelve months to June 2021).
The âreturnâ is the amount earned after tax over the past twelve months. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.02.
Why is ROE important for profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. We now need to assess the profits that the business is reinvesting or âwithholdingâ for future growth, which then gives us an idea of ââthe growth potential of the business. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
A side-by-side comparison of Dogness (International) profit growth and 2.0% ROE
It is difficult to say that the ROE of Dogness (International) is very good in itself. Even compared to the industry average of 16%, the ROE figure is quite disappointing. Therefore, it may not be wrong to say that the 55% drop in five-year net profit observed by Dogness (International) may have been the result of lower ROE. We believe there could be other factors at play here as well. For example, the company has misallocated capital or the company has a very high payout rate.
Moreover, even compared to the industry, which cut profits at a rate of 12% over the same period, we found Dogness (International) ‘s performance to be quite disappointing, as it suggests that the company cut profits. at a faster rate than the industry.
Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. If you are wondering about the valuation of Dogness (International), check out this gauge of its price / earnings ratio, compared to its sector.
Is Dogness (International) effectively reinvesting its profits?
Dogness (International) does not pay any dividends, which means that all of its profits are potentially reinvested in the company, which does not explain why the profits of the company have fallen if it keeps all of its profits. It seems that there could be other reasons for the lack in this regard. For example, the business could be in decline.
Overall, we believe that the performance shown by Dogness (International) can be open to many interpretations. Although the company has a high rate of profit retention, its low rate of return is likely to hamper its profit growth. In conclusion, we would proceed with caution with this business and one way to do that would be to look at the risk profile of the business. You can see the 4 risks we have identified for Dogness (International) by visiting our risk dashboard for free on our platform here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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