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RS Group (LON:RS1) has had a rough three months with its share price down 13%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to RS Group's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for RS Group
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for RS Group is:
13% = UK£170m ÷ UK£1.3b (Based on the trailing twelve months to September 2024).
The 'return' refers to a company's earnings over the last year. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.13.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
A Side By Side comparison of RS Group's Earnings Growth And 13% ROE
To begin with, RS Group seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 13%. This certainly adds some context to RS Group's moderate 9.9% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that RS Group's reported growth was lower than the industry growth of 14% over the last few years, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is RS1 fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is RS Group Efficiently Re-investing Its Profits?
With a three-year median payout ratio of 39% (implying that the company retains 61% of its profits), it seems that RS Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.