Richards Packaging Income Fund's (TSE:RPI.UN) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

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Richards Packaging Income Fund (TSE:RPI.UN) has had a rough three months with its share price down 8.5%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Richards Packaging Income Fund’s ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company’s success at turning shareholder investments into profits.

See our latest analysis for Richards Packaging Income Fund

How Do You 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 Richards Packaging Income Fund is:

31% = CA$50m ÷ CA$161m (Based on the trailing twelve months to December 2020).

The ‘return’ is the yearly profit. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.31 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

Richards Packaging Income Fund’s Earnings Growth And 31% ROE

Firstly, we acknowledge that Richards Packaging Income Fund has a significantly high ROE. Secondly, even when compared to the industry average of 15% the company’s ROE is quite impressive. So, the substantial 31% net income growth seen by Richards Packaging Income Fund over the past five years isn’t overly surprising.

Next, on comparing with the industry net income growth, we found that Richards Packaging Income Fund’s growth is quite high when compared to the industry average growth of 5.7% in the same period, which is great to see.

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Richards Packaging Income Fund is trading on a high P/E or a low P/E, relative to its industry.

Is Richards Packaging Income Fund Making Efficient Use Of Its Profits?

Richards Packaging Income Fund has a significant three-year median payout ratio of 63%, meaning the company only retains 37% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Besides, Richards Packaging Income Fund has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with Richards Packaging Income Fund’s performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Up till now, we’ve only made a short study of the company’s growth data. So it may be worth checking this free detailed graph of Richards Packaging Income Fund’s past earnings, as well as revenue and cash flows to get a deeper insight into the company’s performance.

This article by Simply Wall St is general in nature. 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.

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