Responsive Industries Limited's (NSE:RESPONIND) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Responsive Industries' (NSE:RESPONIND) stock is up by a considerable 45% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Responsive Industries' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Responsive Industries

How Is ROE Calculated?

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 Responsive Industries is:

2.5% = ₹272m ÷ ₹11b (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.02 in profit.

Why Is ROE Important For Earnings Growth?

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

Responsive Industries' Earnings Growth And 2.5% ROE

It is hard to argue that Responsive Industries' ROE is much good in and of itself. Even when compared to the industry average of 11%, the ROE figure is pretty disappointing. Hence, the flat earnings seen by Responsive Industries over the past five years could probably be the result of it having a lower ROE.

We then compared Responsive Industries' net income growth with the industry and found that the average industry growth rate was 17% in the same period.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Responsive Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Responsive Industries Making Efficient Use Of Its Profits?

Responsive Industries' low three-year median payout ratio of 11% (implying that the company keeps89% of its income) should mean that the company is retaining most of its earnings to fuel its growth and this should be reflected in its growth number, but that's not the case.

Moreover, Responsive Industries has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

Overall, we have mixed feelings about Responsive Industries. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Responsive Industries' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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