Declining Stock and Solid Fundamentals: Is The Market Wrong About Crown Lifters Limited (NSE:CROWN)?

With its stock down 12% over the past three months, it is easy to disregard Crown Lifters (NSE:CROWN). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Crown Lifters' ROE in this article.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Crown Lifters

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Crown Lifters is:

42% = ₹153m ÷ ₹361m (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.42 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Crown Lifters' Earnings Growth And 42% ROE

Firstly, we acknowledge that Crown Lifters has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 7.0% which is quite remarkable. As a result, Crown Lifters' exceptional 54% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Crown Lifters' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 27%.

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. 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 Crown Lifters is trading on a high P/E or a low P/E, relative to its industry.

Is Crown Lifters Using Its Retained Earnings Effectively?

Crown Lifters' ' three-year median payout ratio is on the lower side at 7.6% implying that it is retaining a higher percentage (92%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Along with seeing a growth in earnings, Crown Lifters only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

In total, we are pretty happy with Crown Lifters' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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. To know the 4 risks we have identified for Crown Lifters 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.