KRN Heat Exchanger and Refrigeration Limited's (NSE:KRN) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

KRN Heat Exchanger and Refrigeration (NSE:KRN) has had a great run on the share market with its stock up by a significant 88% over the last three months. 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. Particularly, we will be paying attention to KRN Heat Exchanger and Refrigeration's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 KRN Heat Exchanger and Refrigeration

How To 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 KRN Heat Exchanger and Refrigeration is:

8.8% = ₹439m ÷ ₹5.0b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.09 in profit.

What Is The Relationship Between ROE And 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

KRN Heat Exchanger and Refrigeration's Earnings Growth And 8.8% ROE

When you first look at it, KRN Heat Exchanger and Refrigeration's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 12%, the company's ROE leaves us feeling even less enthusiastic. In spite of this, KRN Heat Exchanger and Refrigeration was able to grow its net income considerably, at a rate of 41% in the last five years. So, there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that KRN Heat Exchanger and Refrigeration's growth is quite high when compared to the industry average growth of 27% in the same period, which is great to see.

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. Is KRN Heat Exchanger and Refrigeration fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is KRN Heat Exchanger and Refrigeration Efficiently Re-investing Its Profits?

Given that KRN Heat Exchanger and Refrigeration doesn't pay any regular dividends to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Summary

On the whole, we do feel that KRN Heat Exchanger and Refrigeration has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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 2 risks we have identified for KRN Heat Exchanger and Refrigeration 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.