Does finance have a role to play?

Rocky Mountain Liquor (CVE:RUM) stock is up 11% over the past week. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. In particular, we’ll be paying close attention to Rocky Mountain Liquor’s ROE today.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest analysis for Rocky Mountain Liquor

How is ROE calculated?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Rocky Mountain Liquor is:

8.5% = CA$701,000 ÷ CA$8.2M (based on trailing 12 months to June 2022).

“Yield” refers to a company’s earnings over the past year. This means that for every Canadian dollar of equity, the company generated a profit of 0.09 Canadian dollars.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Rocky Mountain Liquor earnings growth and ROE of 8.5%

At first glance, Rocky Mountain Liquor’s ROE doesn’t have much to say. Then, compared to the industry average ROE of 17%, the company’s ROE leaves us even less excited. However, we are pleasantly surprised to see that Rocky Mountain Liquor has grown its net income at a significant rate of 58% over the past five years. Thus, there could be other aspects that positively influence the profit growth of the company. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.

As a next step, we benchmarked Rocky Mountain Liquor’s net income growth against the industry, and fortunately, we found that the growth the company saw was above the industry average growth of 15%.

past earnings-growth

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. Is Rocky Mountain Liquor fairly priced relative to other companies? These 3 assessment metrics might help you decide.

Does Rocky Mountain Liquor effectively reinvest its profits?

Since Rocky Mountain Liquor pays no dividends to its shareholders, we infer that the company has reinvested all of its earnings to grow its business.

Summary

Overall, we feel Rocky Mountain Liquor has positive characteristics. Even despite the low rate of return, the company has shown impressive earnings growth thanks to massive reinvestment in its business. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. To learn about the 3 risks we have identified for Rocky Mountain Liquor, visit our Risk Dashboard for free.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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