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Is D4t4 Solutions Plc's (LON:D4T4) Latest Stock Performance A Reflection Of Its Financial Health?

D4t4 Solutions' (LON:D4T4) stock is up by a considerable 13% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study D4t4 Solutions' 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for D4t4 Solutions

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for D4t4 Solutions is:

15% = UK£4.4m ÷ UK£29m (Based on the trailing twelve months to March 2020).

The 'return' is the income the business earned 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.

Why Is ROE Important For 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of D4t4 Solutions' Earnings Growth And 15% ROE

At first glance, D4t4 Solutions seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 15%. This certainly adds some context to D4t4 Solutions' exceptional 20% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared D4t4 Solutions' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 20% in the same period.

past-earnings-growth
past-earnings-growth

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about D4t4 Solutions''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is D4t4 Solutions Using Its Retained Earnings Effectively?

D4t4 Solutions has a three-year median payout ratio of 27% (where it is retaining 73% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and D4t4 Solutions is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, D4t4 Solutions is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 30%. However, D4t4 Solutions' future ROE is expected to decline to 10.0% despite there being not much change anticipated in the company's payout ratio.

Conclusion

Overall, we are quite pleased with D4t4 Solutions' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

This article by Simply Wall St is general in nature. 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.

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