Uravi T and Wedge Lamps Limited's (NSE:URAVI) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Uravi T and Wedge Lamps (NSE:URAVI) has had a great run on the share market with its stock up by a significant 26% 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 Uravi T and Wedge Lamps' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Uravi T and Wedge Lamps

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 Uravi T and Wedge Lamps is:

7.1% = ₹16m ÷ ₹228m (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 ₹0.07.

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.

Uravi T and Wedge Lamps' Earnings Growth And 7.1% ROE

It is quite clear that Uravi T and Wedge Lamps' ROE is rather low. Still, the company's ROE is higher than the average industry ROE of 5.4% so that's certainly interesting. Especially considering that Uravi T and Wedge Lamps has seen a decent 17% net income growth seen over the past five years. That being said, the company does have a low ROE to begin with, just that its higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. For instance, the company has a low payout ratio or is being managed efficiently

We then compared Uravi T and Wedge Lamps' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 2.9% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Uravi T and Wedge Lamps is trading on a high P/E or a low P/E, relative to its industry.

Is Uravi T and Wedge Lamps Making Efficient Use Of Its Profits?

Summary

Overall, we are quite pleased with Uravi T and Wedge Lamps' performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate 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. 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. You can see the 4 risks we have identified for Uravi T and Wedge Lamps by visiting our risks dashboard for free on our platform here.

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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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