Is Weakness In Ritchie Bros. Auctioneers Incorporated (NYSE:RBA) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

By
Simply Wall St
Published
March 02, 2021
NYSE:RBA
Source: Shutterstock

With its stock down 25% over the past three months, it is easy to disregard Ritchie Bros. Auctioneers (NYSE:RBA). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Ritchie Bros. Auctioneers' 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.

Check out our latest analysis for Ritchie Bros. Auctioneers

How Is ROE Calculated?

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 Ritchie Bros. Auctioneers is:

17% = US$170m ÷ US$1.0b (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.17 in profit.

Why Is ROE Important For 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.

Ritchie Bros. Auctioneers' Earnings Growth And 17% ROE

To start with, Ritchie Bros. Auctioneers' ROE looks acceptable. On comparing with the average industry ROE of 9.4% the company's ROE looks pretty remarkable. This probably laid the ground for Ritchie Bros. Auctioneers' moderate 10% net income growth seen over the past five years.

As a next step, we compared Ritchie Bros. Auctioneers' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 10% in the same period.

past-earnings-growth
NYSE:RBA Past Earnings Growth March 3rd 2021

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. Is Ritchie Bros. Auctioneers fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Ritchie Bros. Auctioneers Using Its Retained Earnings Effectively?

While Ritchie Bros. Auctioneers has a three-year median payout ratio of 61% (which means it retains 39% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Additionally, Ritchie Bros. Auctioneers has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 46% over the next three years.

Summary

On the whole, we feel that Ritchie Bros. Auctioneers' performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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. 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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