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Could The Market Be Wrong About RBG Holdings plc (LON:RBGP) Given Its Attractive Financial Prospects?

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With its stock down 6.6% over the past month, it is easy to disregard RBG Holdings (LON:RBGP). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to RBG Holdings' ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for RBG Holdings

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for RBG Holdings is:

12% = UK£7.3m ÷ UK£61m (Based on the trailing twelve months to December 2021).

The 'return' is the yearly profit. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.12 in profit.

What Has ROE Got To Do With 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. 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.

RBG Holdings' Earnings Growth And 12% ROE

To begin with, RBG Holdings seems to have a respectable ROE. Even when compared to the industry average of 14% the company's ROE looks quite decent. This probably goes some way in explaining RBG Holdings' significant 22% net income growth over the past five years amongst other factors. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared RBG Holdings' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 0.2%.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for RBGP? You can find out in our latest intrinsic value infographic research report.

Is RBG Holdings Efficiently Re-investing Its Profits?

The three-year median payout ratio for RBG Holdings is 40%, which is moderately low. The company is retaining the remaining 60%. By the looks of it, the dividend is well covered and RBG Holdings is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, RBG Holdings has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 67% over the next three years.

Summary

On the whole, we feel that RBG Holdings' performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 4 risks we have identified for RBG Holdings.

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

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.

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