Is R M Drip and Sprinklers Systems Limited's (NSE:RMDRIP) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

R M Drip and Sprinklers Systems' (NSE:RMDRIP) stock is up by a considerable 66% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on R M Drip and Sprinklers Systems' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for R M Drip and Sprinklers Systems

How Do You Calculate Return On Equity?

Return on equity 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 R M Drip and Sprinklers Systems is:

14% = ₹84m ÷ ₹618m (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.14 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.

R M Drip and Sprinklers Systems' Earnings Growth And 14% ROE

When you first look at it, R M Drip and Sprinklers Systems' ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 14%. Particularly, the exceptional 49% net income growth seen by R M Drip and Sprinklers Systems over the past five years is pretty remarkable. Considering the moderately low ROE, it is quite possible that there might be some 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 R M Drip and Sprinklers Systems' growth is quite high when compared to the industry average growth of 28% 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. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 R M Drip and Sprinklers Systems''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is R M Drip and Sprinklers Systems Making Efficient Use Of Its Profits?

R M Drip and Sprinklers Systems doesn't pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

In total, it does look like R M Drip and Sprinklers Systems has some positive aspects to its business. 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. Our risks dashboard would have the 4 risks we have identified for R M Drip and Sprinklers Systems.

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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.