R&S Group Holding AG's (VTX:RSGN) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

R&S Group Holding (VTX:RSGN) has had a great run on the share market with its stock up by a significant 12% over the last week. 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. Specifically, we decided to study R&S Group Holding's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for R&S Group Holding

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 R&S Group Holding is:

22% = CHF9.3m ÷ CHF41m (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CHF1 worth of shareholders' equity, the company generated CHF0.22 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

R&S Group Holding's Earnings Growth And 22% ROE

To begin with, R&S Group Holding has a pretty high ROE which is interesting. Further, even comparing with the industry average if 19%, the company's ROE is quite respectable. Given the circumstances, the significant 22% net income growth seen by R&S Group Holding over the last five years is not surprising.

Next, on comparing R&S Group Holding's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 20% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 R&S Group Holding fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is R&S Group Holding Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 69% (implying that it keeps only 31% of profits) for R&S Group Holding suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Along with seeing a growth in earnings, R&S Group Holding only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 30% over the next three years. The fact that the company's ROE is expected to rise to 229% over the same period is explained by the drop in the payout ratio.

Conclusion

On the whole, we feel that R&S Group Holding's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of R&S Group Holding's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.