With its stock down 12% over the past three months, it is easy to disregard DHT Holdings (NYSE:DHT). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on DHT Holdings' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How Is ROE Calculated?

Return on equity 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 DHT Holdings is:

15% = US$158m ÷ US$1.0b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.15 in profit.

What Is The Relationship Between ROE And 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of DHT Holdings' Earnings Growth And 15% ROE

At first glance, DHT Holdings seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 16%. Despite the moderate return on equity, DHT Holdings has posted a net income growth of 3.2% over the past five years. A few likely reasons that could be keeping earnings growth low are - the company has a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared DHT Holdings' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 40% in the same period.

Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about DHT Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is DHT Holdings Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 97% (that is, the company retains only 3.4% of its income) over the past three years for DHT Holdings suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Moreover, DHT Holdings has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 113% of its profits over the next three years. However, DHT Holdings' ROE is predicted to rise to 26% despite there being no anticipated change in its payout ratio.

Summary

Overall, we have mixed feelings about DHT Holdings. Despite the high ROE, the company has a disappointing earnings growth number, due to its poor rate of reinvestment into its business. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.