The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. In total, it does look like Dropbox has some positive aspects to its business. This is likely what's driving the high earnings growth number discussed above. Is Dropbox Using Its Retained Earnings Effectively?ĭropbox doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business.
Has the market priced in the future outlook for DBX? You can find out in our latest intrinsic value infographic research report.
Doing so will help them establish if the stock's future looks promising or ominous. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). The basis for attaching value to a company is, to a great extent, tied to its earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio. We believe that there might be other aspects that are positively influencing the company's earnings growth. However, we we're pleasantly surprised to see that Dropbox grew its net income at a significant rate of 29% in the last five years. Not just that, even compared to the industry average of 12%, the company's ROE is entirely unremarkable. It is quite clear that Dropbox's ROE is rather low. A Side By Side comparison of Dropbox's Earnings Growth And 4.1% ROE 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. 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. We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Why Is ROE Important For Earnings Growth? That means that for every $1 worth of shareholders' equity, the company generated $0.04 in profit. The 'return' refers to a company's earnings over the last year. So, based on the above formula, the ROE for Dropbox is:Ĥ.1% = US$33m ÷ US$803m (Based on the trailing twelve months to June 2020).
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