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Rectifier Technologies Limited's (ASX:RFT) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

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  • RFT.AX

Rectifier Technologies (ASX:RFT) has had a rough three months with its share price down 7.7%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Rectifier Technologies' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Rectifier Technologies

How Do You Calculate Return On Equity?

Return on equity 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 Rectifier Technologies is:

12% = AU$1.1m ÷ AU$8.8m (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.12.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of Rectifier Technologies' Earnings Growth And 12% ROE

To begin with, Rectifier Technologies seems to have a respectable ROE. Especially when compared to the industry average of 8.6% the company's ROE looks pretty impressive. This probably laid the ground for Rectifier Technologies' moderate 17% net income growth seen over the past five years.

As a next step, we compared Rectifier Technologies' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 17% in the same period.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. One 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 prospects. So, you may want to check if Rectifier Technologies is trading on a high P/E or a low P/E, relative to its industry.

Is Rectifier Technologies Making Efficient Use Of Its Profits?

While Rectifier Technologies has a three-year median payout ratio of 97% (which means it retains 3.2% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Along with seeing a growth in earnings, Rectifier Technologies only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

In total, it does look like Rectifier Technologies has some positive aspects to its business. Especially the growth in earnings which was backed by an impressive ROE. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Rectifier Technologies' past profit growth, check out this visualization of past earnings, revenue and cash flows.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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