Most readers would already be aware that the share of RUDEN HOLDINGSLtd (TYO: 1400) rose significantly by 82% over the last three months. However, we wonder if the company’s inconsistent financial items would have any negative impact on the current share price moment. In this article, we decided to focus on RUDEN HOLDINGSLtd’s BEET.
Return on equity or ROE is an important factor to consider by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit that each dollar generates in terms of its shareholder investment.
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net profit (from continuing operations) ÷ Equity
So based on the above formula, ROE for RUDEN HOLDINGSLtd is:
2.9% = JP ¥ 80m ÷ JP ¥ 2.7b (Based on the subsequent twelve months to December 2020).
The ‘return’ is the profit for the last twelve months. This means that the company generated 0.03 in profit for each equity worth ¥ 1.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “keep”, we are then able to evaluate a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profits, the higher the growth of a company compared to companies that do not necessarily have these characteristics.
A side-by-side comparison of RUDEN HOLDINGSLtd’s earnings growth and 2.9% ROE
When you first look at it, RUDEN HOLDINGSLtd’s ROE does not look that attractive. Next, compared to the average industry ROE of 8.7%, the company’s ROE leaves us even less excited. Therefore, it is perhaps not wrong to say that the five-year decline in net income of 17% that RUDEN HOLDINGSLtd has seen was probably a result of it having a lower ROE. However, there may also be other factors that cause earnings to fall. For example, the company has a very high payout ratio or faces competitive pressure.
So as a next step, we compared RUDEN HOLDINGSLtd’s performance against the industry and were disappointed to find that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 5.0% over the same period.
Earnings growth is a huge factor in the valuation of stocks. The investor should try to determine if the expected growth or decline in earnings, as the case may be, is priced. By doing so, they will have an idea of whether the stock is heading out into clear blue waters, or if swampy waters await. If you are wondering about the valuation of RUDEN HOLDINGSLtd, check it out this measure of the price-to-earnings ratio, compared to its industry.
Is RUDEN HOLDINGSLtd effectively investing its profits?
Overall, we have mixed feelings towards RUDEN HOLDINGSLtd. Although it seems to keep most of its profits given the low return on investment, after all, investors can not benefit from all that reinvestment. The low earnings growth suggests that our theory is correct. When we wrap up, we will continue with caution with this company, and one way to do that is to look at the company’s risk profile. Our risk dashboard would have the 3 risks we have identified for RUDEN HOLDINGSLtd.
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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 shares and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by basic data. Please note that our analysis may not include the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in the mentioned stocks.
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