Is Weakness In Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt. (BUSE:RICHTER) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

By
Simply Wall St
Published
July 24, 2021
BUSE:RICHTER
Source: Shutterstock

With its stock down 7.5% over the past three months, it is easy to disregard Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt (BUSE:RICHTER). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt

How Do You Calculate Return On Equity?

The formula for return on equity 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:

12% = Ft104b ÷ Ft842b (Based on the trailing twelve months to March 2021).

The 'return' is the amount earned after tax over the last twelve months. That means that for every HUF1 worth of shareholders' equity, the company generated HUF0.12 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. 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.

Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's Earnings Growth And 12% ROE

To begin with, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 11%. This probably goes some way in explaining Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's moderate 11% growth over the past five years amongst other factors.

Next, on comparing Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 10% in the same period.

past-earnings-growth
BUSE:RICHTER Past Earnings Growth July 24th 2021

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). Doing so will help them establish if the stock's future looks promising or ominous. Is Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt fairly valued compared to other companies? These 3 valuation measures might help you decide.

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

Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt has a healthy combination of a moderate three-year median payout ratio of 41% (or a retention ratio of 59%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

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. 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 34%. As a result, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's ROE is not expected to change by much either, which we inferred from the analyst estimate of 14% for future ROE.

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, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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. 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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