Most readers would already be aware that RCI Hospitality Holdings' (NASDAQ:RICK) stock increased significantly by 24% 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 RCI Hospitality Holdings' ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for RCI Hospitality Holdings

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for RCI Hospitality Holdings is:

1.1% = US$3.0m ÷ US$263m (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.01 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

RCI Hospitality Holdings' Earnings Growth And 1.1% ROE

It is hard to argue that RCI Hospitality Holdings' ROE is much good in and of itself. Even compared to the average industry ROE of 12%, the company's ROE is quite dismal. RCI Hospitality Holdings was still able to see a decent net income growth of 14% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared RCI Hospitality Holdings' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 33% in the same period.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 RCI Hospitality Holdings is trading on a high P/E or a low P/E, relative to its industry.

Is RCI Hospitality Holdings Efficiently Re-investing Its Profits?

In RCI Hospitality Holdings' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 4.7% (or a retention ratio of 95%), which suggests that the company is investing most of its profits to grow its business.

Besides, RCI Hospitality Holdings has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, it does look like RCI Hospitality Holdings has some positive aspects to its business. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 3 risks we have identified for RCI Hospitality Holdings visit our risks dashboard for free.

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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.