Is the recent performance of RFG Holdings Limited (JSE:RFG) shares influenced by its fundamentals in any way?
Most readers will already know that shares of RFG Holdings (JSE:RFG) are up a significant 14% over the past week. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. In this article, we decided to focus on the ROE of RFG Holdings.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for RFG Holdings
How is ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for RFG Holdings is:
9.5% = R270m ÷ R2.8b (Based on the last twelve months to April 2022).
The “return” is the annual profit. One way to conceptualize this is that for every ZAR1 of share capital it has, the company has made a profit of ZAR 0.10.
What does ROE have to do with earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
RFG Holdings earnings growth and ROE of 9.5%
It is clear that the ROE of RFG Holdings is rather low. A comparison with the industry shows that the company’s ROE is quite similar to the average industry ROE of 11%. RFG Holdings’ stable earnings over the past five years could likely be the result of lower ROE.
In a next step, we compared RFG Holdings’ net income growth with the industry, and fortunately, we found that the growth the company saw was above the average industry growth of 0.6%. .
Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. Thus, you might want to check whether RFG Holdings is trading on a high P/E or on a low P/E, relative to its industry.
Does RFG Holdings use its profits efficiently?
Despite a moderate three-year median payout ratio of 33% (meaning the company retains 67% of earnings) over the past three years, RFG Holdings’ earnings growth has been more or less stable. Therefore, there could be other reasons for the lack in this regard. For example, the business might be in decline.
Additionally, RFG Holdings has paid dividends over a seven-year period, which means the company’s management is committed to paying dividends even if it means little or no earnings growth. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out about 34% of its earnings over the next three years. Either way, RFG Holdings’ future ROE is expected to reach 12% despite little change expected in its payout ratio.
All in all, it seems that RFG Holdings has positive aspects for its business. Even despite the low rate of return, the company has shown impressive earnings growth thanks to massive reinvestment in its business. That said, the latest forecasts from industry analysts show that the company’s earnings are set to accelerate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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