Sturm Ruger’s ROE in this article.” data-reactid=”28″ type=”text”>Most readers would already be aware that Sturm Ruger’s (NYSE:RGR) stock increased significantly by 20% over the past three months. Given that stock prices are usually aligned with a company’s financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Sturm Ruger’s ROE in this article.
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.
How To Calculate Return On Equity?
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Sturm Ruger is:
15% = US$47m ÷ US$312m (Based on the trailing twelve months to June 2020).
The ‘return’ is the income the business earned over the last year. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.15.
Why Is ROE Important For Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. 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. 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 15% ROE
At first glance, Sturm Ruger seems to have a decent ROE. Even when compared to the industry average of 15% the company’s ROE looks quite decent. As you might expect, the 8.8% net income decline reported by Sturm Ruger is a bit of a surprise. We reckon that there could be some other factors at play here that are preventing the company’s growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
So, as a next step, we compared Sturm Ruger’s performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 22% in the same period.
intrinsic value infographic in our free research report helps visualize whether RGR is currently mispriced by the market.” data-reactid=”58″ type=”text”>Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. 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 Efficiently Re-investing Its Profits?
Despite having a normal three-year median payout ratio of 39% (where it is retaining 61% of its profits), Sturm Ruger has seen a decline in earnings as we saw above. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Moreover, Sturm Ruger has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
risks dashboard for free.” data-reactid=”67″ type=”text”>On the whole, we do feel that Sturm Ruger has some positive attributes. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn’t the case here. This suggests that there might be some external threat to the business, that’s hampering its growth. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 2 risks we have identified for Sturm Ruger visit our risks dashboard for free.
This article by Simply Wall St is general in nature. 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.