Dismal stock performance of Domain Holdings Australia Limited (ASX:DHG) reflects weak fundamentals

Domain Holdings Australia (ASX:DHG) had a tough three months with its share price down 18%. We decided to study the company’s financial statements to determine if the downward trend will continue, as a company’s long-term performance usually dictates market results. In particular, we’ll be paying attention to Domain Holdings Australia’s ROE today.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simpler terms, it measures a company’s profitability relative to equity.

Check out our latest analysis for Domain Holdings Australia

How is ROE calculated?

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 Domain Holdings Australia is:

3.9% = AU$37 million ÷ AU$927 million (based on trailing 12 months to December 2021).

“Yield” is the income the business has earned over the past year. One way to conceptualize this is that for every Australian dollar of share capital it has, the company has made a profit of 0.04 Australian dollars.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. 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 compared to companies that don’t necessarily exhibit these characteristics.

Domain Holdings Australia profit growth and 3.9% ROE

At first glance, Domain Holdings Australia’s ROE does not look very promising. A quick closer look shows that the company’s ROE also doesn’t compare favorably to the industry average of 12%. Therefore, it may not be wrong to say that the 15% drop in net income over five years that Domain Holdings Australia saw was likely the result of lower ROE. However, there could also be other factors leading to lower income. Such as – low income retention or poor capital allocation.

So, as a next step, we benchmarked Domain Holdings Australia’s performance against the industry and were disappointed to find that while the company was cutting profits, the industry was increasing profits at a rate of 10%. during the same period.

ASX: DHG Past Earnings Growth July 6, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Has the market priced in future prospects for DHG? You can find out in our latest infographic research report on intrinsic value.

Does Domain Holdings Australia use its profits efficiently?

Domain Holdings Australia has a high LTM (or trailing twelve months) payout ratio of 101% (i.e. it retains -0.9% of its earnings). This suggests that the company pays out most of its profits in the form of dividends to its shareholders. This partly explains why his income has declined. With only a small portion reinvested in the business, earnings growth would obviously be weak or non-existent. You can see the 2 risks we have identified for Domain Holdings Australia by visiting our risk dashboard for free on our platform here.

Additionally, Domain Holdings Australia has been paying dividends for four years, which is a considerable length of time, suggesting that management must have perceived that shareholders preferred consistent dividends even though profits had declined. After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to drop to 68% over the next three years. Consequently, the expected decline in the payout ratio of Domain Holdings Australia explains the anticipated increase in the company’s future ROE to 8.9%, over the same period.

Summary

All in all, we would find it hard to think before deciding on any investment action regarding Domain Holdings Australia. In particular, its ROE is a huge disappointment, not to mention its lack of proper reinvestment in the business. As a result, its earnings growth was also quite disappointing. That said, looking at current analyst estimates, we found that the company’s earnings growth rate should see a huge improvement. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

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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