Sturm, Ruger & Company, Inc.'s (NYSE:RGR) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?
Sturm Ruger (NYSE:RGR) has had a rough three months with its share price down 6.8%. 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. In this article, we decided to focus on Sturm Ruger's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Sturm Ruger
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Sturm Ruger is:
22% = US$72m ÷ US$322m (Based on the trailing twelve months to April 2023).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.22 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.
Sturm Ruger's Earnings Growth And 22% ROE
First thing first, we like that Sturm Ruger has an impressive ROE. Additionally, a comparison with the average industry ROE of 19% also portrays the company's ROE in a good light. Given the circumstances, the significant 24% net income growth seen by Sturm Ruger over the last five years is not surprising.
Next, on comparing Sturm Ruger's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 23% in the same 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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Sturm Ruger's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Sturm Ruger Making Efficient Use Of Its Profits?
Sturm Ruger has a three-year median payout ratio of 39% (where it is retaining 61% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Sturm Ruger is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Additionally, Sturm Ruger 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.
Conclusion
In total, we are pretty happy with Sturm Ruger's 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 2 risks we have identified for Sturm Ruger visit our risks dashboard for free.
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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.
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