Is KNR Constructions Limited's (NSE:KNRCON) Latest Stock Performance A Reflection Of Its Financial Health?

Most readers would already be aware that KNR Constructions' (NSE:KNRCON) stock increased significantly by 50% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study KNR Constructions' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for KNR Constructions

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 KNR Constructions is:

18% = ₹3.2b ÷ ₹18b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.18 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

A Side By Side comparison of KNR Constructions' Earnings Growth And 18% ROE

To begin with, KNR Constructions seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.4%. This probably laid the ground for KNR Constructions' moderate 19% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that KNR Constructions' growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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 KNR Constructions''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is KNR Constructions Using Its Retained Earnings Effectively?

KNR Constructions' three-year median payout ratio to shareholders is 2.2% (implying that it retains 98% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

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.

Summary

In total, we are pretty happy with KNR Constructions' 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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