Is Richardson Electronics, Ltd.'s (NASDAQ:RELL) Recent Stock Performance Tethered To Its Strong Fundamentals?
Richardson Electronics (NASDAQ:RELL) has had a great run on the share market with its stock up by a significant 23% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Richardson Electronics' ROE in this article.
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.
Check out our latest analysis for Richardson Electronics
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 Richardson Electronics is:
11% = US$17m ÷ US$160m (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.11 in profit.
What Has ROE Got To Do With 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. 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.
Richardson Electronics' Earnings Growth And 11% ROE
At first glance, Richardson Electronics seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 11%. This probably goes some way in explaining Richardson Electronics' significant 64% net income growth over the past five years amongst other factors. However, there could also be other drivers behind this growth. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Richardson Electronics' 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 16%.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Richardson Electronics fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Richardson Electronics Using Its Retained Earnings Effectively?
Richardson Electronics' three-year median payout ratio to shareholders is 17%, which is quite low. This implies that the company is retaining 83% 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.
Additionally, Richardson Electronics 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.
Summary
Overall, we are quite pleased with Richardson Electronics' 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.
