Eveready Industries India Limited's (NSE:EVEREADY) Stock Is Going Strong: Is the Market Following Fundamentals?

Eveready Industries India (NSE:EVEREADY) has had a great run on the share market with its stock up by a significant 64% over the last 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. Specifically, we decided to study Eveready Industries India's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Eveready Industries India

How To Calculate Return On Equity?

ROE 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 Eveready Industries India is:

32% = ₹1.8b ÷ ₹5.6b (Based on the trailing twelve months to March 2020).

The 'return' is the income the business earned over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.32.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learnt 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Eveready Industries India's Earnings Growth And 32% ROE

First thing first, we like that Eveready Industries India has an impressive ROE. Secondly, even when compared to the industry average of 14% the company's ROE is quite impressive. Probably as a result of this, Eveready Industries India was able to see a decent net income growth of 11% over the last five years.

We then performed a comparison between Eveready Industries India's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 10% in the same period.

Earnings growth is a huge factor in stock valuation. 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 Eveready Industries India's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Eveready Industries India Making Efficient Use Of Its Profits?

In Eveready Industries India's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 21% (or a retention ratio of 79%), which suggests that the company is investing most of its profits to grow its business.

Conclusion

On the whole, we feel that Eveready Industries India's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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. Our risks dashboard would have the 4 risks we have identified for Eveready Industries India.

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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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