Over the past quarter, shares in Rocky Mountain Liquor (CVE:RUM) have risen significantly, showing an impressive 78% increase. However, with the company’s financial statistics fluctuating, there are doubts whether this strong share price trajectory can be sustained. In this article, we are going to explore Rocky Mountain Liquor’s ROE.
ROE, or Return on Equity, is a benchmark used to evaluate how efficiently a firm’s management is using the firm’s money. It essentially calculates a business’ profitability relative to shareholders’ equity.
Read our most recent analytical report on Rocky Mountain Liquor
Let’s take a look at the formula for ROE:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
From this given equation, the ROE for Rocky Mountain Liquor equates to:
3.1% = CA$273k ÷ CA$8.8m (Calculated from the previous twelve months leading up to September 2023).
The term ‘return’ is defined as the total amount gained after tax over the span of the previous twelve months. Hence, this implies that for every CA$1 of its shareholder’s investments, the organization yields a profit of CA$0.03.
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. 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.
It is quite clear that Rocky Mountain Liquor’s ROE is rather low. Not just that, even compared to the industry average of 17%, the company’s ROE is entirely unremarkable. Therefore, the disappointing ROE therefore provides a background to Rocky Mountain Liquor’s very little net income growth of 3.9% over the past five years.
Next, on comparing with the industry net income growth, we found that Rocky Mountain Liquor’s reported growth was lower than the industry growth of 9.2% over the last few years, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Rocky Mountain Liquor fairly valued compared to other companies? These 3 valuation measures might help you decide.
Currently, Rocky Mountain Liquor does not distribute any dividends, indicating that they reinvest all of their profits back into the business. However, this fact doesn’t solely explain the low earnings growth figure we previously mentioned. Therefore, there may be other reasons, such as a deteriorating business condition.
In general, Rocky Mountain Liquor’s performance could be interpreted in various ways. Although the company reinvests at a high rate, the low Return on Equity (ROE) suggests that this reinvestment brings no benefits to its investors, and worse, it negatively affects the earnings growth. To wrap up, it would be wise to proceed with caution regarding this company. One way to ensure this could be by considering the business’s risk profile. Our risks dashboard would detail the three risks we have identified for Rocky Mountain Liquor.
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This general piece by Simply Wall St is grounded in historical data and analyst forecasts and utilizes an unbiased methodology. Our contents do not serve as financial advice and do not provide stock purchase or sell recommendations. Instead, they fail to consider personal objectives or financial circumstances. Our aim is to deliver fundamental data-driven long-term analysis. Note that our study may neglect the most recent price-sensitive company announcements or qualitative material. Simply Wall St has no stakes in any stocks mentioned.
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