Is Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt.'s (BUSE:RICHTER) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's (BUSE:RICHTER) stock increased significantly by 5.5% over the past week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's 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.

Check out our latest analysis for Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt is:

17% = Ft213b ÷ Ft1.2t (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every HUF1 of its shareholder's investments, the company generates a profit of HUF0.17.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's Earnings Growth And 17% ROE

To start with, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 13%. This probably laid the ground for Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's significant 23% net income growth seen over the past 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 Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt Efficiently Re-investing Its Profits?

Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt has a three-year median payout ratio of 36% (where it is retaining 64% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt is reinvesting its earnings efficiently.

Besides, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt has been paying dividends for at least ten years or more. 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 44% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Summary

In total, we are pretty happy with Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's performance. 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.