Is Bannari Amman Sugars Limited's (NSE:BANARISUG) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that Bannari Amman Sugars' (NSE:BANARISUG) stock increased significantly by 44% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Bannari Amman Sugars' ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Bannari Amman Sugars

How Is ROE Calculated?

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 Bannari Amman Sugars is:

7.5% = ₹956m ÷ ₹13b (Based on the trailing twelve months to March 2020).

The 'return' is the profit over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.08.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Bannari Amman Sugars' Earnings Growth And 7.5% ROE

As you can see, Bannari Amman Sugars' ROE looks pretty weak. Even when compared to the industry average of 9.5%, the ROE figure is pretty disappointing. Although, we can see that Bannari Amman Sugars saw a modest net income growth of 20% over the past five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing Bannari Amman Sugars' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 17% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Bannari Amman Sugars''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Bannari Amman Sugars Efficiently Re-investing Its Profits?

Bannari Amman Sugars has a low three-year median payout ratio of 14%, meaning that the company retains the remaining 86% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Additionally, Bannari Amman Sugars has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, it does look like Bannari Amman Sugars has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 3 risks we have identified for Bannari Amman Sugars 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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