RAVE Restaurant Group, Inc.'s (NASDAQ:RAVE) Stock Is Going Strong: Is the Market Following Fundamentals?

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RAVE Restaurant Group’s (NASDAQ:RAVE) stock is up by a considerable 16% over the past month. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on RAVE Restaurant Group’s ROE.

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.

View our latest analysis for RAVE Restaurant Group

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for RAVE Restaurant Group is:

30% = US$2.2m ÷ US$7.1m (Based on the trailing twelve months to March 2022).

The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.30 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. 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.

A Side By Side comparison of RAVE Restaurant Group’s Earnings Growth And 30% ROE

First thing first, we like that RAVE Restaurant Group has an impressive ROE. Secondly, even when compared to the industry average of 19% the company’s ROE is quite impressive. So, the substantial 43% net income growth seen by RAVE Restaurant Group over the past five years isn’t overly surprising.

Next, on comparing with the industry net income growth, we found that the growth figure reported by RAVE Restaurant Group compares quite favourably to the industry average, which shows a decline of 0.9% in the same period.

past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is RAVE Restaurant Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is RAVE Restaurant Group Making Efficient Use Of Its Profits?

RAVE Restaurant Group doesn’t pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

In total, we are pretty happy with RAVE Restaurant Group’s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 2 risks we have identified for RAVE Restaurant Group 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.

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