Reynolds Consumer Products Inc.'s (NASDAQ:REYN) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Most readers would already be aware that Reynolds Consumer Products' (NASDAQ:REYN) stock increased significantly by 10% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Reynolds Consumer Products' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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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 Reynolds Consumer Products is:

15% = US$312m ÷ US$2.1b (Based on the trailing twelve months to June 2025).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.15 in profit.

View our latest analysis for Reynolds Consumer Products

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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of Reynolds Consumer Products' Earnings Growth And 15% ROE

To begin with, Reynolds Consumer Products seems to have a respectable ROE. Be that as it may, the company's ROE is still quite lower than the industry average of 25%. Additionally, the flat earnings seen by Reynolds Consumer Products over the past five years doesn't paint a very bright picture. Not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. Hence there might be some other aspects that are causing the flat growth in earnings. For example, it could be that the company has a high payout ratio or the business has alloacted capital, for instance.

We then compared Reynolds Consumer Products' net income growth with the industry and found that the company's growth figure is a bit less than the average industry growth rate of 0.9% in the same 5-year 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Reynolds Consumer Products fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Reynolds Consumer Products Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 65% (meaning, the company retains only 35% of profits) for Reynolds Consumer Products suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

In addition, Reynolds Consumer Products has been paying dividends over a period of six years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 57%. Accordingly, forecasts suggest that Reynolds Consumer Products' future ROE will be 15% which is again, similar to the current ROE.

Conclusion

Overall, we have mixed feelings about Reynolds Consumer Products. Specifically, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return. Investors may have benefitted, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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.