RFG Holdings’ (JSE:RFG) stock is up by a considerable 23% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on RFG Holdings’ ROE.
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 RFG Holdings
How Is ROE Calculated?
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 RFG Holdings is:
14% = R478m ÷ R3.4b (Based on the trailing twelve months to October 2023).
The ‘return’ is the yearly profit. That means that for every ZAR1 worth of shareholders’ equity, the company generated ZAR0.14 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. 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.
RFG Holdings’ Earnings Growth And 14% ROE
At first glance, RFG Holdings’ ROE doesn’t look very promising. Although a closer study shows that the company’s ROE is higher than the industry average of 11% which we definitely can’t overlook. Even more so after seeing RFG Holdings’ exceptional 22% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So, there might well be other reasons for the earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.
As a next step, we compared RFG 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 3.9%.
Earnings growth is an important metric to consider when valuing a stock. 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. Is RFG fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
Is RFG Holdings Efficiently Re-investing Its Profits?
RFG Holdings’ three-year median payout ratio is a pretty moderate 31%, meaning the company retains 69% of its income. So it seems that RFG Holdings is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that’s well covered.
Additionally, RFG Holdings has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 35%. Accordingly, forecasts suggest that RFG Holdings’ future ROE will be 14% which is again, similar to the current ROE.
Summary
In total, we are pretty happy with RFG Holdings’ performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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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.
