Should Weakness in Raven Industries, Inc.'s (NASDAQ:RAVN) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

By
Simply Wall St
Published
October 12, 2020
NasdaqGS:RAVN

Raven Industries (NASDAQ:RAVN) has had a rough month with its share price down 6.9%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Raven Industries' ROE today.

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 Raven Industries

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 Raven Industries is:

7.1% = US$22m ÷ US$318m (Based on the trailing twelve months to July 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.07.

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. 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.

Raven Industries' Earnings Growth And 7.1% ROE

On the face of it, Raven Industries' ROE is not much to talk about. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 16%. Despite this, surprisingly, Raven Industries saw an exceptional 21% net income growth over the past five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Raven Industries' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.5%.

past-earnings-growth
NasdaqGS:RAVN Past Earnings Growth October 12th 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Raven Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Raven Industries Using Its Retained Earnings Effectively?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. This is likely what's driving the high earnings growth number discussed above.

Our latest analyst data shows that the future payout ratio of the company is expected to drop to 31% over the next three years. The fact that the company's ROE is expected to rise to 8.6% over the same period is explained by the drop in the payout ratio.

Summary

On the whole, we do feel that Raven Industries has some positive attributes. 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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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. 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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