With its stock down 23% in the past three months, it’s easy to overlook Digital Turbine (NASDAQ: APPS). 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 this article, we decided to focus on the ROE of Digital Turbine.
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 simple terms, it is used to assess the profitability of a company in relation to its equity.
Check out our latest analysis for Digital Turbine
How is ROE calculated?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Digital Turbine is:
9.4% = $45 million ÷ $486 million (based on trailing twelve months to December 2021).
“Yield” is the income the business has earned over the past year. This means that for every dollar of shareholders’ equity, the company generated $0.09 in profit.
Why is ROE important for 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. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Digital Turbine’s earnings growth and 9.4% ROE
At first glance, there isn’t much to say about Digital Turbine’s ROE. Yet further investigation shows that the company’s ROE is similar to the industry average of 11%. Additionally, we are very pleased to see that Digital Turbine’s net income has grown significantly at a rate of 73% over the past five years. Given the moderately low ROE, it is quite possible that other aspects positively influence the company’s earnings growth. For example, the business has a low payout ratio or is efficiently managed.
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 20% over the same period, which is great to see.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. Thus, you might want to check whether Digital Turbine is trading on a high P/E or on a low P/E, relative to its industry.
Does Digital Turbine use its profits efficiently?
Since Digital Turbine does not pay any dividends to its shareholders, we infer that the company has reinvested all of its profits to grow its business.
Summary
Overall, we feel that Digital Turbine has positive attributes. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in its profits. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page 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.
