Yahoo Finance Richelieu Hardware Ltd. (TSE:RCH) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?
It is hard to get excited after looking at Richelieu Hardware's (TSE:RCH) recent performance, when its stock has declined 11% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Richelieu Hardware's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Richelieu Hardware
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 Richelieu Hardware is:
12% = CA$107m ÷ CA$916m (Based on the trailing twelve months to February 2024).
The 'return' refers to a company's earnings over the last year. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.12 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Richelieu Hardware's Earnings Growth And 12% ROE
To begin with, Richelieu Hardware seems to have a respectable ROE. Even so, when compared with the average industry ROE of 15%, we aren't very excited. Richelieu Hardware was still able to see a decent net income growth of 17% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. So this also provides some context to the earnings growth seen by the company.
We then compared Richelieu Hardware's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 24% in the same 5-year period, which is a bit concerning.
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. Is RCH fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Richelieu Hardware Using Its Retained Earnings Effectively?
Richelieu Hardware's three-year median payout ratio to shareholders is 15% (implying that it retains 85% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.
Besides, Richelieu Hardware has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.
Conclusion
Overall, we feel that Richelieu Hardware certainly does have some positive factors to consider. In particular, it's great to see that the company is investing heavily into its business and along with a moderate rate of return, that has resulted in a respectable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 1 risk we have identified for Richelieu Hardware visit our risks dashboard for free.
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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.
