Dogness (International) (NASDAQ:DOGZ) stock is up 133% in the past three months. But the company’s key financial indicators seem to differ across the board, leading us to wonder whether the company’s current share price momentum can be sustained or not. In particular, we will pay 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 investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
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) ÷ Equity
So, based on the above formula, the ROE for Dogness (International) is:
2.0% = $1.3m ÷ $65m (based on trailing 12 months to June 2021).
The “yield” is the amount earned after tax over the last twelve months. This therefore means that for every $1 of investment by its shareholder, the company generates a profit of $0.02.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.
A side-by-side comparison of Dogness (International) earnings growth and ROE of 2.0%
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% decline in net income over five years observed by Dogness (International) was possibly 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 ratio.
Moreover, even when compared to the industry, which has cut profits at a rate of 12% over the same period, we found that the performance of Dogness (International) is quite disappointing, as it suggests that the company has seen its profits decline. at a faster rate than the industry.
Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about the valuation of Dogness (International), check out this indicator of its price/earnings ratio, relative to its sector.
Does Dogness (International) effectively reinvest its profits?
Dogness (International) pays no dividends, which means that potentially all of its profits are reinvested in the company, which does not explain why the company’s profits have decreased if it retains all of its profits. It seems that there could be other reasons for the lack in this regard. For example, the business might 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 earnings retention rate, its low rate of return is likely hampering its earnings growth. In conclusion, we would proceed with caution with this business and one way to do that would be to review 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 only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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