Is Kajaria Ceramics Limited's (NSE:KAJARIACER) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that Kajaria Ceramics' (NSE:KAJARIACER) stock increased significantly by 37% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Kajaria Ceramics' ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Kajaria Ceramics

How Do You 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 Kajaria Ceramics is:

9.6% = ₹1.7b ÷ ₹18b (Based on the trailing twelve months to June 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 ₹0.10.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned 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 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.

A Side By Side comparison of Kajaria Ceramics' Earnings Growth And 9.6% ROE

On the face of it, Kajaria Ceramics' ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 6.4%, is definitely interesting. However, Kajaria Ceramics has seen a flattish net income growth over the past five years, which is not saying much. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the low to flat growth in earnings could also be the result of this.

As a next step, we compared Kajaria Ceramics' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 13% in the same period.

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Kajaria Ceramics is trading on a high P/E or a low P/E, relative to its industry.

Is Kajaria Ceramics Using Its Retained Earnings Effectively?

Kajaria Ceramics has a low three-year median payout ratio of 20% (or a retention ratio of 80%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

Additionally, Kajaria Ceramics has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 23%. Still, forecasts suggest that Kajaria Ceramics' future ROE will rise to 15% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we feel that Kajaria Ceramics certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

If you decide to trade Kajaria Ceramics, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.