Is RaySearch Laboratories AB (publ)'s (STO:RAY B) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that RaySearch Laboratories' (STO:RAY B) stock increased significantly by 30% over the past three months. 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 RaySearch Laboratories' 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How To Calculate Return On Equity?

Return on equity 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 RaySearch Laboratories is:

24% = kr224m ÷ kr922m (Based on the trailing twelve months to March 2025).

The 'return' is the profit over the last twelve months. That means that for every SEK1 worth of shareholders' equity, the company generated SEK0.24 in profit.

Check out our latest analysis for RaySearch Laboratories

What Is The Relationship Between ROE And Earnings Growth?

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

RaySearch Laboratories' Earnings Growth And 24% ROE

Firstly, we acknowledge that RaySearch Laboratories has a significantly high ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. So, the substantial 56% net income growth seen by RaySearch Laboratories over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that RaySearch Laboratories' growth is quite high when compared to the industry average growth of 0.4% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about RaySearch Laboratories''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is RaySearch Laboratories Using Its Retained Earnings Effectively?

RaySearch Laboratories has a three-year median payout ratio of 27% (where it is retaining 73% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and RaySearch Laboratories is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, RaySearch Laboratories is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.

Summary

Overall, we are quite pleased with RaySearch Laboratories' 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.