Yahoo Finance Redox Limited's (ASX:RDX) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?
Redox's (ASX:RDX) stock is up by a considerable 15% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Redox'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.
View our latest analysis for Redox
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Redox is:
16% = AU$83m ÷ AU$512m (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.16 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Redox's Earnings Growth And 16% ROE
To begin with, Redox seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 11%. This probably laid the ground for Redox's significant 21% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Redox's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 27% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Redox's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Redox Efficiently Re-investing Its Profits?
The really high three-year median payout ratio of 18,235% for Redox suggests that the company is paying its shareholders more than what it is earning. In spite of this, the company was able to grow its earnings significantly, as we saw above. Although, it could be worth keeping an eye on the high payout ratio as that's a huge risk.
Our latest analyst data shows that the future payout ratio of the company is expected to drop to 75% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.
Conclusion
On the whole, we do feel that Redox has some positive attributes. As noted earlier, its earnings growth has been quite decent, and the high ROE does contribute to that growth. Still, the company invests little to almost none of its profits. This could potentially reduce the odds that the company continues to see the same level of growth in the future. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.
