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With its stock down 33% over the past month, it is easy to disregard Rush Street Interactive (NYSE:RSI). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Rush Street Interactive's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Rush Street Interactive
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 Rush Street Interactive is:
3.6% = US$7.2m ÷ US$198m (Based on the trailing twelve months to December 2024).
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 $0.04 in profit.
Why Is ROE Important For 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. 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.
Rush Street Interactive's Earnings Growth And 3.6% ROE
It is quite clear that Rush Street Interactive's ROE is rather low. Not just that, even compared to the industry average of 15%, the company's ROE is entirely unremarkable. Therefore, Rush Street Interactive's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.
As a next step, we compared Rush Street Interactive's 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.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Has the market priced in the future outlook for RSI? You can find out in our latest intrinsic value infographic research report.