Can Mixed Fundamentals Have A Negative Impact on Pentagon Rubber Limited (NSE:PENTAGON) Current Share Price Momentum?

Most readers would already be aware that Pentagon Rubber's (NSE:PENTAGON) stock increased significantly by 45% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Pentagon Rubber'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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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 Pentagon Rubber is:

7.3% = ₹24m ÷ ₹326m (Based on the trailing twelve months to September 2025).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.07 in profit.

See our latest analysis for Pentagon Rubber

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.

Pentagon Rubber's Earnings Growth And 7.3% ROE

It is quite clear that Pentagon Rubber's ROE is rather low. Not just that, even compared to the industry average of 12%, the company's ROE is entirely unremarkable. Accordingly, Pentagon Rubber's low net income growth of 4.2% over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Pentagon Rubber's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 26% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for PENTAGON? You can find out in our latest intrinsic value infographic research report

Is Pentagon Rubber Efficiently Re-investing Its Profits?

Pentagon Rubber doesn't pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. However, there's only been very little earnings growth to show for it. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Summary

In total, we're a bit ambivalent about Pentagon Rubber's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 3 risks we have identified for Pentagon Rubber 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.