Daqo New Energy Corp. (NYSE: DQ) recently showed weakness, but financial data looks strong: Should potential shareholders take the plunge?
It’s hard to get excited after looking at the recent performance of Daqo New Energy (NYSE: DQ), as its stock has fallen 27% in the past three months. However, a closer look at his strong finances might get you to think again. Since fundamentals usually determine long-term market outcomes, the business is worth considering. In particular, we will pay particular attention to Daqo New Energy’s ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.
See our latest analysis for Daqo New Energy
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Daqo New Energy’s ROE is:
21% = US $ 188 million ÷ US $ 885 million (based on the last twelve months to March 2021).
The “return” is the amount earned after tax over the past twelve months. This means that for every dollar in shareholders’ equity, the company generated $ 0.21 in profit.
What does ROE have to do with profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
Daqo New Energy profit growth and 21% ROE
At first glance, Daqo New Energy appears to have a decent ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 14%. It is probably because of this that Daqo New Energy has been able to record a decent growth of 17% over the past five years.
As a next step, we compared Daqo New Energy’s net income growth with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 16% over the course of the same period.
Profit growth is a huge factor in the valuation of stocks. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. In doing so, he will have an idea if the action is heading for clear blue waters or swampy waters ahead. If you are wondering about the valuation of Daqo New Energy, check out this gauge of its price / earnings ratio, compared to its sector.
Is Daqo New Energy Efficiently Using Its Profits?
Overall, we think Daqo New Energy’s performance has been quite good. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. However, according to the latest forecast from industry analysts, the company’s profits are expected to decline in the future. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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