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Rocky Brands, Inc. (NASDAQ: RCKY) Shares Are Rising, But Financials Look Mixed: Will Momentum Continue?
Rocky Brands (NASDAQ:RCKY) has had a great run on the stock market, with its shares rising a significant 35% in the last month. However, we decided to pay attention to the company’s fundamentals which do not seem to give a clear signal about the company’s financial health. In this article, we decided to focus on Rocky Marks’ ROE.
Return on equity or ROE is an important factor for a shareholder to consider because it indicates how effectively their capital is being reinvested. Put another way, it reveals the company’s success in transforming shareholder investments into profits.
See our latest analysis for Rocky Brands
How do you calculate return on equity?
O formula for return on equity It is:
Return on Equity = Net Profit (from continuing operations) ÷ Equity
Therefore, based on the above formula, Rocky Brands’ ROE is:
5.9% = US$13m ÷ US$225m (Based on trailing twelve months to March 2024).
The ‘return’ is the revenue the company made in the last year. Another way to think of this is that for every $1 of equity, the company was able to make $0.06 in profit.
What is the relationship between ROE and 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 can then assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with a high return on equity and profit retention have a higher growth rate than companies that do not share these attributes.
Rocky Brands Earnings Growth and ROE of 5.9%
At first glance, Rocky Brands’ ROE isn’t much to talk about. A quick, in-depth study shows that the company’s ROE also doesn’t compare favorably to the industry average of 11%. Therefore, it may not be wrong to say that the 3.5% decline in five-year net profit seen by Rocky Brands was likely the result of its lower ROE. We believe that there may also be other aspects that are negatively influencing the company’s earnings prospects. For example, it is possible that the company has allocated capital poorly or that the company has a payout ratio that is too high.
However, when we compared Rocky Brands’ growth to the industry, we found that although the company’s profits declined, the industry saw earnings growth of 15% over the same period. This is quite worrying.
past profit growth
Earnings growth is an important factor in stock valuation. The investor should attempt to establish whether the expected growth or decline in earnings, whatever the case may be, is priced in. Doing so will give you an idea of whether the action is heading towards clear blue waters or if swampy waters await. A 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 might want check if Rocky Brands is trading on a high or low P/Ein relation to your sector.
The story continues
Is Rocky Brands reinvesting its profits efficiently?
Rocky Brands’ low three-year average payout ratio of 22% (implying it retains the remaining 78% of its profits) is a surprise when you combine it with the reduction in profits. Normally, this shouldn’t be the case when a company retains most of its profits. It seems that there may be other reasons to explain the lack in this regard. For example, the business may be in decline.
Furthermore, Rocky Brands has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth.
Conclusion
All told, we’re a bit ambivalent about Rocky Brands’ performance. Although the company has a high profit retention rate, its low rate of return is likely hindering its earnings growth. In conclusion, we would proceed with caution with this company and one way to do so would be to look at the risk profile of the business. You can see the 4 risks we identified for Rocky Brands by visiting our risk panel for free on our platform here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.