DXC Technology Company (NYSE:DXC) stock has seen strong momentum: does that call for further study of its financial outlook?
DXC Technology Inc (NYSE:DXC) has had a strong run in the stock market with a significant 22% rise in its stock over the past month. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. In this article, we decided to focus on the ROE of DXC Technology.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest analysis for DXC technology
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 DXC Technology is:
14% = $736 million ÷ $5.4 billion (based on trailing 12 months to March 2022).
The “yield” is the profit of the last twelve months. This means that for every dollar of shareholders’ equity, the company generated $0.14 in profit.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective earnings-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings 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.
DXC Technology Earnings Growth and 14% ROE
For starters, DXC Technology seems to have a respectable ROE. And comparing with the industry, we found that the industry average ROE is similar at 16%. For this reason, DXC Technology’s 30% decline in net income over five years raises the question of why decent ROE has not translated into growth. Based on this, we believe that there might be other reasons which have not been discussed so far in this article which might hinder the growth of the business. For example, the company pays a large portion of its profits in the form of dividends or faces competitive pressures.
So, as a next step, we benchmarked DXC Technology’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 15%. during the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title 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. So, you might want to check if DXC Technology is trading on a high P/E or a low P/E, relative to its industry.
Does DXC technology effectively reinvest its profits?
DXC Technology pays no dividends, which means the company keeps all of its profits, which makes us wonder why it keeps its profits if it can’t use them to grow its business. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.
All in all, it seems that DXC Technology has positive aspects for its business. However, we are disappointed to see a lack of earnings growth, even despite a high ROE and high reinvestment rate. We believe there could be external factors that could negatively impact the business. That said, we have studied current analyst estimates and found that analysts expect the company’s earnings growth to improve slightly. The company’s existing shareholders might get a bit of a break after all. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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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.