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It is hard to get excited after looking at Richelieu Hardware's (TSE:RCH) recent performance, when its stock has declined 24% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Richelieu Hardware's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Richelieu Hardware
How To Calculate Return On Equity?
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 Richelieu Hardware is:
22% = CA$152m ÷ CA$697m (Based on the trailing twelve months to February 2022).
The 'return' is the yearly profit. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.22 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Richelieu Hardware's Earnings Growth And 22% ROE
To begin with, Richelieu Hardware has a pretty high ROE which is interesting. Even when compared to the industry average of 23% the company's ROE is pretty decent. The high ROE therefore is what most likely laid the ground for the decent growth of 16% seen over the past five years by Richelieu Hardware.
Next, on comparing Richelieu Hardware's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 18% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is RCH worth today? The intrinsic value infographic in our free research report helps visualize whether RCH is currently mispriced by the market.