April 13, 2024
Finance

Are Strong Financial Prospects The Force That Is Driving The Momentum In RPMGlobal Holdings Limited’s ASX:RUL) Stock?


RPMGlobal Holdings (ASX:RUL) has had a great run on the share market with its stock up by a significant 26% over the last three months. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to RPMGlobal 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for RPMGlobal Holdings

How To 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 RPMGlobal Holdings is:

16% = AU$9.4m ÷ AU$58m (Based on the trailing twelve months to December 2023).

The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every A$1 of its shareholder’s investments, the company generates a profit of A$0.16.

What Is The Relationship Between ROE And Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. 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. 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.

A Side By Side comparison of RPMGlobal Holdings’ Earnings Growth And 16% ROE

To begin with, RPMGlobal Holdings seems to have a respectable ROE. On comparing with the average industry ROE of 9.5% the company’s ROE looks pretty remarkable. Probably as a result of this, RPMGlobal Holdings was able to see an impressive net income growth of 38% over the last five years. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that RPMGlobal Holdings’ growth is quite high when compared to the industry average growth of 25% in the same period, which is great to see.

past-earnings-growthpast-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. If you’re wondering about RPMGlobal Holdings”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is RPMGlobal Holdings Efficiently Re-investing Its Profits?

Given that RPMGlobal Holdings doesn’t pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Summary

Overall, we are quite pleased with RPMGlobal Holdings’ performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high 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.

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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