It’s hard to get excited after watching the recent performance of Digital Turbine Inc (NASDAQ:APPS), as its stock is down 23% in the past month. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In particular, we’ll be paying close attention to Digital Turbine’s ROE today.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest analysis for Digital Turbine
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 formula above, the ROE for Digital Turbine is:
6.3% = $36 million ÷ $578 million (based on trailing 12 months to June 2022).
The “yield” is the profit of the last twelve months. So, this means that for every $1 of investment by its shareholder, the firm generates a profit of $0.06.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. 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 all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
A side-by-side comparison of Digital Turbine’s earnings growth and ROE of 6.3%
When you first look at it, Digital Turbine’s ROE doesn’t look that appealing. A quick closer look shows that the company’s ROE also doesn’t compare favorably to the industry average of 12%. Despite this, astonishingly, Digital Turbine has seen exceptional net profit growth of 66% over the past five years. We believe there could be other factors at play here. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
Then, comparing with the industry net income growth, we found that Digital Turbine’s growth is quite high compared to the average industry growth of 25% over the same period, which is great to see.
Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about Digital Turbine’s valuation, check out this indicator of its price-earnings ratio, relative to its sector.
Does Digital Turbine effectively use its retained earnings?
Digital Turbine currently pays no dividends, which essentially means that it has reinvested all of its profits back into the business. This certainly contributes to the high earnings growth number we discussed above.
Conclusion
All in all, it seems that Digital Turbine has positive aspects for its business. Even despite the low rate of return, the company has shown impressive earnings growth thanks to massive reinvestment in its business. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
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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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