Should Weakness in Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt.'s (BUSE:RICHTER) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 2.8% over the past three months, it is easy to disregard Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt (BUSE:RICHTER). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's ROE.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See 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:

7.6% = Ft84b ÷ Ft1.1t (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each HUF1 of shareholders' capital it has, the company made HUF0.08 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.

A Side By Side comparison of Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's Earnings Growth And 7.6% ROE

When you first look at it, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 11%, the company's ROE leaves us feeling even less enthusiastic. In spite of this, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt was able to grow its net income considerably, at a rate of 30% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 13% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. 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 Making Efficient Use Of Its Profits?

Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt's three-year median payout ratio is a pretty moderate 40%, meaning the company retains 60% of its income. By the looks of it, the dividend is well covered and Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 35%. Regardless, the future ROE for Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt is predicted to rise to 21% despite there being not much change expected in its payout ratio.

Summary

In total, it does look like Richter Gedeon Vegyészeti Gyár Nyilvánosan Muködo Rt has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.