Is Revolve Group, Inc.'s(NYSE:RVLV) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Revolve Group's (NYSE:RVLV) stock increased significantly by 47% over the past three months. 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 Revolve 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Revolve 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 Revolve Group is:

28% = US$57m ÷ US$200m (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.28.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Revolve Group's Earnings Growth And 28% ROE

To begin with, Revolve Group has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 22% also doesn't go unnoticed by us. So, the substantial 50% net income growth seen by Revolve Group over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Revolve Group's growth is quite high when compared to the industry average growth of 24% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is RVLV fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Revolve Group Efficiently Re-investing Its Profits?

Conclusion

On the whole, we feel that Revolve Group's performance has been quite good. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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