Bharat Bijlee Limited's (NSE:BBL) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Bharat Bijlee's (NSE:BBL) stock is up by a considerable 12% over the past week. 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. In this article, we decided to focus on Bharat Bijlee's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Bharat Bijlee

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Bharat Bijlee is:

7.0% = ₹1.3b ÷ ₹19b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.07 in profit.

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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Bharat Bijlee's Earnings Growth And 7.0% ROE

It is quite clear that Bharat Bijlee's ROE is rather low. Even when compared to the industry average of 14%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Bharat Bijlee grew its net income at a significant rate of 30% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Bharat Bijlee's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 30% over the last few years.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Bharat Bijlee's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Bharat Bijlee Efficiently Re-investing Its Profits?

Bharat Bijlee has a three-year median payout ratio of 27% (where it is retaining 73% of its income) which is not too low or not too high. So it seems that Bharat Bijlee is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, Bharat Bijlee has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we feel that Bharat Bijlee certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. 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 1 risk we have identified for Bharat Bijlee visit our risks dashboard for free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.