DFI Retail Group Holdings' (SGX:D01) stock is up by a considerable 27% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study DFI Retail Group Holdings' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How To Calculate Return On Equity?

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 DFI Retail Group Holdings is:

13% = US$121m ÷ US$952m (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.13 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

DFI Retail Group Holdings' Earnings Growth And 13% ROE

To start with, DFI Retail Group Holdings' ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 4.8%. For this reason, DFI Retail Group Holdings' five year net income decline of 43% raises the question as to why the high ROE didn't translate into earnings growth. We reckon that there could be some other factors at play here that are preventing the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

However, when we compared DFI Retail Group Holdings' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 7.4% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is DFI Retail Group Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is DFI Retail Group Holdings Making Efficient Use Of Its Profits?

DFI Retail Group Holdings' high three-year median payout ratio of 114% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Paying a dividend higher than reported profits is not a sustainable move. To know the 2 risks we have identified for DFI Retail Group Holdings visit our risks dashboard for free.

Moreover, DFI Retail Group 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. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 67% over the next three years. As a result, the expected drop in DFI Retail Group Holdings' payout ratio explains the anticipated rise in the company's future ROE to 22%, over the same period.

Conclusion

Overall, we have mixed feelings about DFI Retail Group Holdings. While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.