Rakon (NZSE: RAK) stock has risen 39% in the past three months. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . In particular, we will pay close attention to Rakon’s ROE today.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. Simply put, it is used to assess a company’s profitability against its equity.
See our latest review for Rakon
How is the ROE calculated?
The formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Rakon’s ROE is:
9.3% = NZ $ 9.6 million ÷ NZ $ 104 million (based on the last twelve months to March 2021).
“Return” refers to a company’s profits over the past year. This means that for every NZ $ 1 worth of equity, the company generated NZ $ 0.09 in profit.
What does ROE have to do with profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates 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 remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
A side-by-side comparison of Rakon’s profit growth and 9.3% ROE
At first glance, Rakon’s ROE doesn’t look very promising. We then compared the company’s ROE to that of the industry as a whole and were disappointed to find that the ROE is 23% below the industry average. Despite this, Rakon was able to significantly increase his bottom line, at a rate of 51% over the past five years. Thus, there could be other aspects that positively influence the growth of the company’s profits. For example, the business has a low payout ratio or is managed efficiently.
Then comparing with the industry net income growth, we found that Rakon’s growth is quite high compared to the industry average growth of 11% over the same period, which is great. to have.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. Is Rakon valued enough compared to other companies? These 3 evaluation measures could help you decide.
Is Rakon Using Its Retained Earnings Effectively?
Rakon does not pay any dividends to its shareholders, which means the company has reinvested all of its profits in the business. This is probably what explains the high number of profit growth discussed above.
All in all, it looks like Rakon has some positive aspects for his business. Even despite the low rate of return, the company has shown impressive profit growth by reinvesting heavily in its operations. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. You can see the 2 risks we have identified for Rakon by visiting our risk dashboard for free on our platform here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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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