Is River Tech p.l.c.'s (OB:RIVER) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

River Tech's (OB:RIVER) stock is up by a considerable 12% over the past 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. Particularly, we will be paying attention to River Tech's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

How Do You 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 River Tech is:

57% = €6.4m ÷ €11m (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. That means that for every NOK1 worth of shareholders' equity, the company generated NOK0.57 in profit.

View our latest analysis for River Tech

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of River Tech's Earnings Growth And 57% ROE

Firstly, we acknowledge that River Tech has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 9.3% which is quite remarkable. As a result, River Tech's exceptional 23% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing River Tech's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 23% over the last few years.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about River Tech's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is River Tech Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 59% (implying that it keeps only 41% of profits) for River Tech suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

While River Tech has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Conclusion

In total, we are pretty happy with River Tech's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into River Tech's past profit growth, check out this visualization of past earnings, revenue and cash flows.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.