Most readers already know that the stock of Dogness (International) (NASDAQ: DOGZ) has risen significantly by 103% in the past three months. However, we wonder if the inconsistent financial data of the company would negatively impact the current momentum in stock prices. In particular, we will pay special attention to the ROE of Dogness (International) today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Dogness (International) is:
2.0% = US $ 1.3 million ÷ US $ 65 million (based on the last twelve months to June 2021).
The “return” is the annual profit. Another way to look at this is that for every dollar in equity, the company was able to make $ 0.02 in profit.
What does ROE have to do with profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or “withholds” and its efficiency, we are then able to assess a company’s profit growth potential. 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.
Dogness (International) profit growth and ROE of 2.0%
It is quite clear that the ROE of Dogness (International) is rather low. Even compared to the industry average of 14%, the ROE figure is quite disappointing. Therefore, it might 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. However, other factors can also lead to lower income. For example, the company has misallocated capital or the company has a very high payout rate.
Then when we compared the industry, which cut profits at a rate of 13% over the same period, we still found the performance of Dogness (International) to be quite dismal, as the company reduced its profits faster than the industry.
NasdaqGM: DOGZ Past Profit Growth October 31, 2021
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. Is Dogness (International) valued enough compared to other companies? Those 3 valuation measures could help you decide.
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.
All in all, we are a little ambivalent about the performance of Dogness (International). 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 company and one way to do it would be to look at the risk profile of the company. To know the 4 risks that we have identified for Dogness (International) visit our risk dashboard for free.
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