Should Weakness in KRN Heat Exchanger and Refrigeration Limited's (NSE:KRN) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 17% over the past month, it is easy to disregard KRN Heat Exchanger and Refrigeration (NSE:KRN). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to KRN Heat Exchanger and Refrigeration's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Our free stock report includes 1 warning sign investors should be aware of before investing in KRN Heat Exchanger and Refrigeration. Read for free now.

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:

9.9% = ₹497m ÷ ₹5.0b (Based on the trailing twelve months to December 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.10 in profit.

Check out our latest analysis for KRN Heat Exchanger and Refrigeration

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.

KRN Heat Exchanger and Refrigeration's Earnings Growth And 9.9% ROE

When you first look at it, KRN Heat Exchanger and Refrigeration's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 12%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that KRN Heat Exchanger and Refrigeration's net income grew significantly at a rate of 38% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

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 26% in the same period, which is great to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 KRN Heat Exchanger and Refrigeration is trading on a high P/E or a low P/E, relative to its industry.

Is KRN Heat Exchanger and Refrigeration Using Its Retained Earnings Effectively?

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.

Conclusion

On the whole, we do feel that KRN Heat Exchanger and Refrigeration has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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 KRN Heat Exchanger and Refrigeration visit our risks dashboard for free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.