The fundamentals of RBR Group Limited (ASX:RBR) look quite solid: could the market be wrong about the stock?

RBR Group (ASX:RBR) had a tough three months with its share price down 40%. However, stock prices are usually determined by a company’s long-term finances, which in this case seem quite respectable. In this article, we have decided to focus on RBR Group’s ROE.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

See our latest analysis for RBR Group

How do you calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for RBR Group is:

74% = AU$3.6m ÷ AU$4.9m (based on trailing 12 months to December 2021).

The “return” is the annual profit. This therefore means that for every A$1 of investment by its shareholder, the company generates a profit of A$0.74.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective earnings-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of RBR Group’s earnings growth and ROE of 74%

First, we recognize that RBR Group has a significantly high ROE. Second, even when compared to the industry average of 16%, the company’s ROE is quite impressive. However, for some reason, the higher returns are not reflected in RBR Group’s low five-year average net income growth of 2.5%. This is interesting because the high returns should mean that the company has the capacity to generate strong growth, but for some reason it has not been able to do so. We believe that low growth, when returns are high enough, may be the result of certain circumstances such as low earnings retention or poor capital allocation.

Then, when comparing with the sector’s net income growth, we found that the reported growth of the RBR Group was lower than the sector’s growth of 26% over the same period, which we don’t like to see.

ASX: RBR Past Earnings Growth May 31, 2022

The basis for attaching value to a company is, to a large extent, linked 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 ominous. If you’re wondering about RBR Group’s valuation, check out this indicator of its price/earnings ratio, relative to its sector.

Does the RBR group effectively reinvest its profits?

RBR Group does not pay any dividends, which means that potentially all of its profits are reinvested in the company. However, there has been very little earnings growth for this. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.

Summary

Overall, we think RBR Group certainly has some positive factors to consider. Still, the weak earnings growth is a bit of a concern, especially since the company has a high rate of return and reinvests a huge portion of its earnings. At first glance, there could be other factors, which do not necessarily control the business, that are preventing growth. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. To find out about the 4 risks we have identified for RBR Group, visit our risk dashboard for free.

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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