With its stock down 5.6% over the past three months, it’s easy to disregard Rave Restaurant Group (NASDAQ:RAVE). However, share prices are usually driven by a company’s long-term financial performance, which in this case looks quite promising. In this article, we’ve focused on Rave Restaurant Group’s return on equity.
Return on equity, or ROE, is an important factor for a shareholder to consider as it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company relative to its equity.
Check out our latest analysis for Rave Restaurant Group
How do you calculate return on equity?
The Formula for return on equity Is:
Return on equity = Net profit (from continuing operations) ÷ Equity
Based on the above formula, the ROE for Rave Restaurant Group is:
19% = $2.2 million ÷ $12 million (based on the trailing twelve months ending March 2024).
The “return” is the amount earned after taxes over the last twelve months. This means that for every dollar invested by its shareholders, the company earned $0.19 in profit.
What is the relationship between ROE and earnings growth?
We have already established that return on equity (ROE) serves as an efficient measure of a company’s future earnings. Depending on how much of those earnings the company reinvests or “retains” and how effectively it does so, we can assess a company’s earnings growth potential. Generally speaking, companies with high return on equity and earnings retention will have a higher growth rate than companies that do not have these characteristics, all other things being equal.
A comparison of Rave Restaurant Group’s earnings growth and 19% return on equity
At first glance, Rave Restaurant Group appears to have a decent return on equity. And when comparing it to the industry, we found that the industry average return on equity is similarly high at 18%. This likely laid the foundation for the impressive 43% net income growth that Rave Restaurant Group has seen over the past five years. However, there could be other factors behind this growth, such as high retained earnings or efficient management.
We then compared Rave Restaurant Group’s net profit growth with that of the industry and are pleased to note that the company’s growth rate is higher than that of the industry, which experienced a growth rate of 29% over the same 5-year period.
Earnings growth is an important metric when evaluating a stock. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or earnings decline). This will help them determine whether the stock’s future looks promising or bleak. Is Rave Restaurant Group fairly valued compared to other companies? These 3 valuation metrics could help you decide.
Does the Rave Restaurant Group reinvest its profits efficiently?
Rave Restaurant Group does not pay regular dividends to its shareholders, which means that the company has reinvested all its profits into the business. This is probably the reason for the high earnings growth discussed above.
Summary
Overall, we are quite happy with Rave Restaurant Group’s performance. In particular, we like that the company reinvests a large portion of its profits at a high rate of return. This has naturally led to the company posting a significant increase in profits. If the company continues to grow its profits at this rate, this could have a positive impact on the share price, as earnings per share influence long-term share prices. Not to forget that share price trends also depend on the potential risks a company may face, so it is important that investors are aware of the risks associated with the business. You can view the 3 risks we have identified for Rave Restaurant Group on our website. Risk Dashboard free on our platform here.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
