DOW share price in focus
Downer is a leading provider of integrated infrastructure services in Australia and New Zealand. They are responsible for building, maintaining and operating transit systems, utilities services and public infrastructure.
Although the name may not be familiar, you have certainly come across their work. Downer operates services like Yarra Trams in Melbourne, and makes the passenger trains you see in most states.
Downer separates its business into three main segments: Transportation, Utilities and Facilities. Transportation provides a little over 50% of its revenue and utilities and facilities around 20% and 30% respectively.
Key metrics
If you’ve ever tried to read a company’s income statement on an annual report, you know how complicated it can be. Although there are many ways you can break down a statement, there are three main ones. Revenue, Gross Marginand profit.
Revenue is important for obvious reasons – everything else (profits, margins, return on equity, etc.) is downstream of a company’s ability to generate sales and revenue. What we are looking for is not an absolute number, but rather. trend. The DOW last reported annual revenue of $10,980m with a Compound Annual Growth Rate (CAGR) -1.6% per year over the last 3 years.
The next thing we’ll want to look at is gross margin. Gross margin tells us how profitable the underlying products/services are – before you take into account all overhead costs, how much money does the company make selling $100 worth of goods and services? DOW’s most recently reported gross margin was 11.5%.
Finally, we get the profit, the real headline number. Last financial year Downer EDI Ltd reported a profit of $56m. This compares to 3 years ago when they made a profit of $176m, representing a CAGR of -31.7%.
Financial health of DOW shares
Next, we can consider Capital Health of the company. What we are trying to work out is whether the company is generating a reasonable return on their equity (total shareholder value) and whether they have a good buffer of safety. There is an important step to consider. Net debt. It is simply the total debt minus the company’s cash holdings.
In DOW’s case, current net debt sits at $994m. A higher number here means that the company has a lot of debt which potentially means higher interest payments, higher volatility, and higher sensitivity to interest rates. A negative value, on the other hand, indicates that the company has more cash than debt, which can be seen as good (a large safety buffer) or bad (inefficient capital allocation).
A metric that may be more valuable to us. Debt/Equity Percentage. It tells us how much debt the company has compared to shareholder ownership. In other words, how leveraged is the company? Downer EDI Ltd’s debt/equity ratio is 81.1%, which means they have more equity than debt.
Finally, we can see Return on Equity (ROE). ROE tells us how much profit a company is making as a percentage of its total equity – a high number indicates that the company is effectively allocating capital and creating value, while a low number indicates that the company’s growth may be starting to slow. DOW generated an ROE of 3.6% in FY24.
What to make of DOW stocks?
One way to get a ‘quick study’ of where the DOW share price is may be to study something like the dividend yield over time. Remember, the dividend yield is effectively ‘cash flow’ to a shareholder, but it can fluctuate from year to year or between payments. Downer EDI Ltd shares currently have a dividend yield of around 2.15%, compared to a 5-year average of 3.74%. Simply put, DOW stocks are trading below their historical average dividend yield. Be careful how you interpret this information – it could mean that profits have fallen, or the share price is rising, or both. In the case of the DOW, last year’s dividend was below the 3-year average, so the dividend has been falling.
Rask websites offer free online investing courses, created by analysts explaining things like discounted cash flow (DCF) and dividend discount models (DDM). They even include free valuation spreadsheets! Both of these models would be a better way to value the DOW share price.
