Is Raketech Group Holding PLC's (STO:RAKE) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Raketech Group Holding (STO:RAKE) has had a great run on the share market with its stock up by a significant 73% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Raketech Group Holding's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Raketech Group Holding

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Raketech Group Holding is:

7.9% = €5.6m ÷ €71m (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. So, this means that for every SEK1 of its shareholder's investments, the company generates a profit of SEK0.08.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Raketech Group Holding's Earnings Growth And 7.9% ROE

When you first look at it, Raketech Group Holding's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 20%, the company's ROE leaves us feeling even less enthusiastic. However, the moderate 8.1% net income growth seen by Raketech Group Holding over the past five years is definitely a positive. So, the growth in the company's earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Raketech Group Holding's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 18% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. 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 Raketech Group Holding is trading on a high P/E or a low P/E, relative to its industry.

Is Raketech Group Holding Making Efficient Use Of Its Profits?

Summary

On the whole, we do feel that Raketech Group Holding has some positive attributes. That is, a decent growth in earnings backed by a high rate of reinvestment. However, we do feel that that earnings growth could have been higher if the business were to improve on the low ROE rate. Especially given how the company is reinvesting a huge chunk of its profits. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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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