Does Quincaillerie Richelieu Ltée (TSE: RCH) ‘s latest performance reflect its financial health?
Quincaillerie Richelieu (TSE: RCH) had a strong run in the equity market with its stock rising significantly 5.9% over the past week. Since the market typically pays for a company’s long-term fundamentals, we decided to study the company’s KPIs to see if they could influence the market. In particular, we will pay particular attention to Quincaillerie Richelieu’s ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. Simply put, it is used to assess a company’s profitability against its equity.
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How is the ROE calculated?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, according to the above formula, the ROE of Quincaillerie Richelieu is:
20% = C $ 125 million ÷ C $ 625 million (based on the last twelve months up to August 2021).
The “return” is the income the business has earned over the past year. One way to conceptualize this is that for every C $ 1 of shareholder capital it has, the company has made C $ 0.20 in profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Quincaillerie Richelieu’s 20% profit growth and ROE
For starters, Quincaillerie Richelieu seems to have a respectable ROE. Even compared to the industry average of 22%, the company’s ROE looks pretty decent. Therefore, this likely laid the groundwork for the decent 11% growth seen over the past five years by Quincaillerie Richelieu.
We then compared Quincaillerie Richelieu’s net income growth with the industry and found that the company’s growth figure is lower than the industry’s average growth rate of 21% over the same period. which is a bit disturbing.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. What is RCH worth today? The intrinsic value infographic in our free research report helps to visualize whether RCH is currently poorly valued by the market.
Does Quincaillerie Richelieu use its retained earnings effectively?
Quincaillerie Richelieu’s three-year median payout ratio to shareholders is 20% (implying that it keeps 80% of its revenues), which is lower, so it appears that management is massively reinvesting profits to grow his company.
In addition, Quincaillerie Richelieu has been paying dividends for at least ten years or more. This shows that the company is committed to sharing the profits with its shareholders. Our latest analyst data shows the company’s future payout ratio is expected to drop to 15% over the next three years. However, the company’s ROE is not expected to change much despite the expected lower payout ratio.
Overall, we are very satisfied with the performance of Quincaillerie Richelieu. In particular, we like the fact that the company is reinvesting heavily in its business, and at a high rate of return. As a result, its decent profit growth is not surprising. That said, the latest forecast from industry analysts shows that the company’s earnings growth is expected to slow. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.