Has RugVista Group AB (publ)'s (STO:RUG) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

RugVista Group's (STO:RUG) stock is up by a considerable 12% over the past month. 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. Specifically, we decided to study RugVista Group's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for RugVista Group

How Do You 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 RugVista Group is:

13% = kr70m ÷ kr543m (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. Another way to think of that is that for every SEK1 worth of equity, the company was able to earn SEK0.13 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

RugVista Group's Earnings Growth And 13% ROE

To begin with, RugVista Group seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 7.7%. Given the circumstances, we can't help but wonder why RugVista Group saw little to no growth in the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital.

We then compared RugVista Group's net income growth with the industry and found that the average industry growth rate was 9.3% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is RUG fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is RugVista Group Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 53% (implying that the company keeps only 47% of its income) of its business to reinvest into its business), most of RugVista Group's profits are being paid to shareholders, which explains the absence of growth in earnings.

Additionally, RugVista Group started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 49% of its profits over the next three years. Regardless, the future ROE for RugVista Group is predicted to rise to 19% despite there being not much change expected in its payout ratio.

Summary

In total, it does look like RugVista Group has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.