Gorman-Rupp (NYSE: GRC) stock is skyrocketing but financial data looks inconsistent: will the uptrend continue?
Gorman-Rupp (NYSE: GRC) stock has risen 21% in the past three months. However, we wonder if the company’s inconsistent financial data would negatively impact the current momentum in stock prices. Specifically, we decided to study the Gorman-Rupp ROE in this article.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
See our latest review for Gorman-Rupp
How is the ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the Gorman-Rupp ROE is:
9.1% = US $ 30 million ÷ US $ 329 million (based on the last twelve months to September 2021).
“Return” refers to a company’s profits over the past year. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.09.
Why is ROE important for profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future 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. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Gorman-Rupp profit growth and 9.1% ROE
At first glance, Gorman-Rupp’s ROE doesn’t look very promising. A quick follow-up study shows that the company’s ROE also does not compare favorably to the industry average of 13%. As a result, Gorman-Rupp’s low net income growth of 2.7% over the past five years may possibly be explained by low ROE, among other factors.
Then, comparing with the industry’s net income growth, we found that Gorman-Rupp’s reported growth was lower than the industry’s growth of 8.5% over the same period, which we do not like to see.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or worrisome. Is Gorman-Rupp just valued over other companies? These 3 evaluation measures could help you decide.
Is Gorman-Rupp effectively reinvesting its profits?
While Gorman-Rupp has a decent three-year median payout ratio of 43% (or a retention rate of 57%), it has experienced very weak earnings growth. Therefore, there could be other reasons for the lack in this regard. For example, the business could be in decline.
In addition, Gorman-Rupp has paid dividends over a period of at least ten years, which suggests that sustaining dividend payments is much more important to management, even if it comes at the expense of the growth of the company. ‘business.
Overall, we have mixed feelings about Gorman-Rupp. Although the company has a high reinvestment rate, the low ROE means that all that reinvestment is not benefiting its investors and, moreover, it has a negative impact on profit growth. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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 documents. Simply Wall St has no position in the mentioned stocks.
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