Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt.'s (BUSE:RICHTER) Stock Has Fared Decently: Is the Market Following Strong Financials?

Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's (BUSE:RICHTER) stock up by 8.8% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt'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.

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

How To Calculate Return On Equity?

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:

20% = Ft230b ÷ Ft1.2t (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every HUF1 worth of shareholders' equity, the company generated HUF0.20 in profit.

Why Is ROE Important For 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. 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.

Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's Earnings Growth And 20% ROE

At first glance, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt seems to have a decent ROE. Especially when compared to the industry average of 14% the company's ROE looks pretty impressive. Probably as a result of this, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt was able to see an impressive net income growth of 25% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's 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 13%.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt is trading on a high P/E or a low P/E, relative to its industry.

Is Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt Using Its Retained Earnings Effectively?

Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's three-year median payout ratio is a pretty moderate 39%, meaning the company retains 61% of its income. So it seems that Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

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 over the next three years is expected to be approximately 43%. Accordingly, forecasts suggest that Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's future ROE will be 18% which is again, similar to the current 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.