Is Weakness In Datametrex AI Limited (CVE:DM) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Datametrex AI (CVE:DM) has had a rough month with its share price down 11%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Datametrex AI’s 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. Put another way, it reveals the company’s success at turning shareholder investments into profits.

See our latest analysis for Datametrex AI

How Is ROE Calculated?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Datametrex AI is:

24% = CA$7.6m ÷ CA$31m (Based on the trailing twelve months to September 2021).

The ‘return’ is the income the business earned over the last year. So, this means that for every CA$1 of its shareholder’s investments, the company generates a profit of CA$0.24.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Datametrex AI’s Earnings Growth And 24% ROE

Firstly, we acknowledge that Datametrex AI has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 14% also doesn’t go unnoticed by us. Under the circumstances, Datametrex AI’s considerable five year net income growth of 42% was to be expected.

As a next step, we compared Datametrex AI’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 30%.

past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Datametrex AI fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Datametrex AI Using Its Retained Earnings Effectively?

Given that Datametrex AI doesn’t pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, we are pretty happy with Datametrex AI’s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let’s not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 2 risks we have identified for Datametrex AI visit our risks dashboard for free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.