Are Strong Financial Prospects The Force That Is Driving The Momentum In KNR Constructions Limited's NSE:KNRCON) Stock?

Most readers would already be aware that KNR Constructions' (NSE:KNRCON) stock increased significantly by 10% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on KNR Constructions' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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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 KNR Constructions is:

32% = ₹13b ÷ ₹42b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.32 in profit.

View our latest analysis for KNR Constructions

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

KNR Constructions' Earnings Growth And 32% ROE

To begin with, KNR Constructions has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 14% the company's ROE is quite impressive. Under the circumstances, KNR Constructions' considerable five year net income growth of 27% was to be expected.

As a next step, we compared KNR Constructions' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 32% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is KNR Constructions fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is KNR Constructions Making Efficient Use Of Its Profits?

KNR Constructions' ' three-year median payout ratio is on the lower side at 1.5% implying that it is retaining a higher percentage (98%) of its profits. So it looks like KNR Constructions is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, KNR Constructions has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 2.1% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 11% over the same period.

Conclusion

Overall, we are quite pleased with KNR Constructions' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.