Will Weakness in Sturm, Ruger & Company, Inc.'s (NYSE:RGR) Stock Prove Temporary Given Strong Fundamentals?
It is hard to get excited after looking at Sturm Ruger's (NYSE:RGR) recent performance, when its stock has declined 5.8% over the past month. 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 Sturm Ruger's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Sturm Ruger
How Is ROE Calculated?
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 Sturm Ruger is:
27% = US$107m ÷ US$399m (Based on the trailing twelve months to October 2022).
The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.27 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. 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. 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.
Sturm Ruger's Earnings Growth And 27% ROE
To begin with, Sturm Ruger has a pretty high ROE which is interesting. Further, even comparing with the industry average if 29%, the company's ROE is quite respectable. Given the circumstances, the significant 28% net income growth seen by Sturm Ruger over the last five years is not surprising.
We then performed a comparison between Sturm Ruger's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 34% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is RGR worth today? The intrinsic value infographic in our free research report helps visualize whether RGR is currently mispriced by the market.
Is Sturm Ruger Making Efficient Use Of Its Profits?
Sturm Ruger's three-year median payout ratio is a pretty moderate 39%, meaning the company retains 61% of its income. 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.
Moreover, Sturm Ruger 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.
Conclusion
On the whole, we feel that Sturm Ruger's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for Sturm Ruger.
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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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