Could The Market Be Wrong About RCI Hospitality Holdings, Inc. (NASDAQ:RICK) Given Its Attractive Financial Prospects?
It is hard to get excited after looking at RCI Hospitality Holdings' (NASDAQ:RICK) recent performance, when its stock has declined 8.8% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to RCI Hospitality Holdings' 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for RCI Hospitality Holdings
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for RCI Hospitality Holdings is:
16% = US$36m ÷ US$227m (Based on the trailing twelve months to March 2022).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.16 in profit.
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. 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. 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.
A Side By Side comparison of RCI Hospitality Holdings' Earnings Growth And 16% ROE
To start with, RCI Hospitality Holdings' ROE looks acceptable. Further, the company's ROE is similar to the industry average of 17%. This probably goes some way in explaining RCI Hospitality Holdings' moderate 9.6% growth over the past five years amongst other factors.
Next, on comparing with the industry net income growth, we found that the growth figure reported by RCI Hospitality Holdings compares quite favourably to the industry average, which shows a decline of 2.6% in the same period.
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). Doing so will help them establish if the stock's future looks promising or ominous. Is RICK fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is RCI Hospitality Holdings Making Efficient Use Of Its Profits?
RCI Hospitality Holdings has a low three-year median payout ratio of 5.7%, meaning that the company retains the remaining 94% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Besides, RCI Hospitality Holdings has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders.
Summary
In total, we are pretty happy with RCI Hospitality Holdings' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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. 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.
