Is Weakness In Rogers Sugar Inc. (TSE:RSI) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

editorial-team@simplywallst.com (Simply Wall St)

Tue, Dec 31, 2024, 4:47 AM 4 min read

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Rogers Sugar is:

13% = CA$54m ÷ CA$422m (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.13 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Rogers Sugar's Earnings Growth And 13% ROE

To begin with, Rogers Sugar seems to have a respectable ROE. Especially when compared to the industry average of 7.7% the company's ROE looks pretty impressive. This certainly adds some context to Rogers Sugar's exceptional 22% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

When you consider the fact that the industry earnings have shrunk at a rate of 3.2% in the same 5-year period, the company's net income growth is pretty remarkable.

past-earnings-growth — TSX:RSI Past Earnings Growth December 31st 2024

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Rogers Sugar's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Rogers Sugar Using Its Retained Earnings Effectively?

Rogers Sugar has a significant three-year median payout ratio of 73%, meaning the company only retains 27% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Besides, Rogers Sugar has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 57% over the next three years. As a result, the expected drop in Rogers Sugar's payout ratio explains the anticipated rise in the company's future ROE to 16%, over the same period.

Conclusion

Overall, we are quite pleased with Rogers Sugar's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Up till now, we've only made a short study of the company's growth data. You can do your own research on Rogers Sugar and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.