Yahoo Finance Sturm, Ruger & Company, Inc.'s (NYSE:RGR) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?
Sturm Ruger (NYSE:RGR) has had a rough three months with its share price down 15%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Sturm Ruger'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 Sturm Ruger
How Is ROE Calculated?
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 Sturm Ruger is:
44% = US$149m ÷ US$338m (Based on the trailing twelve months to October 2021).
The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.44.
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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Sturm Ruger's Earnings Growth And 44% ROE
Firstly, we acknowledge that Sturm Ruger has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 29% also doesn't go unnoticed by us. This likely paved the way for the modest 10% net income growth seen by Sturm Ruger over the past five years. growth
Next, on comparing with the industry net income growth, we found that Sturm Ruger's reported growth was lower than the industry growth of 16% in the same period, which is not something we like to see.
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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Sturm Ruger's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Sturm Ruger Using Its Retained Earnings Effectively?
With a three-year median payout ratio of 39% (implying that the company retains 61% of its profits), it seems that Sturm Ruger is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
Moreover, Sturm Ruger is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.
Summary
Overall, we are quite pleased with Sturm Ruger's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 3 risks we have identified for Sturm Ruger 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.
