Is Rent-A-Center, Inc.'s(NASDAQ:RCII) Recent Stock Performance Tethered To Its Strong Fundamentals?

Rent-A-Center's (NASDAQ:RCII) stock is up by a considerable 73% 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 Rent-A-Center's 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Rent-A-Center

How Do You 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 Rent-A-Center is:

35% = US$208m ÷ US$592m (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.35 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Rent-A-Center's Earnings Growth And 35% ROE

First thing first, we like that Rent-A-Center has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 18% also doesn't go unnoticed by us. So, the substantial 84% net income growth seen by Rent-A-Center over the past five years isn't overly surprising.

As a next step, we compared Rent-A-Center's 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 6.2%.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Rent-A-Center's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Rent-A-Center Efficiently Re-investing Its Profits?

Rent-A-Center's three-year median payout ratio to shareholders is 23%, which is quite low. This implies that the company is retaining 77% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, Rent-A-Center is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 21% of its profits over the next three years.

Summary

In total, we are pretty happy with Rent-A-Center's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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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