Advani Hotels & Resorts (India) Limited's (NSE:ADVANIHOTR) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that Advani Hotels & Resorts (India)'s (NSE:ADVANIHOTR) stock increased significantly by 22% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Advani Hotels & Resorts (India)'s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Advani Hotels & Resorts (India)

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 Advani Hotels & Resorts (India) is:

24% = ₹113m ÷ ₹473m (Based on the trailing twelve months to March 2020).

The 'return' is the profit over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.24 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Advani Hotels & Resorts (India)'s Earnings Growth And 24% ROE

To start with, Advani Hotels & Resorts (India)'s ROE looks acceptable. On comparing with the average industry ROE of 5.0% the company's ROE looks pretty remarkable. Probably as a result of this, Advani Hotels & Resorts (India) was able to see a decent growth of 18% over the last five years.

Next, on comparing with the industry net income growth, we found that Advani Hotels & Resorts (India)'s growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Advani Hotels & Resorts (India)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Advani Hotels & Resorts (India) Using Its Retained Earnings Effectively?

Advani Hotels & Resorts (India) has a three-year median payout ratio of 42%, which implies that it retains the remaining 58% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, Advani Hotels & Resorts (India) is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

Overall, we are quite pleased with Advani Hotels & Resorts (India)'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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 2 risks we have identified for Advani Hotels & Resorts (India) visit our risks dashboard for free.

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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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