R M Drip and Sprinklers Systems Limited's (NSE:RMDRIP) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that R M Drip and Sprinklers Systems' (NSE:RMDRIP) stock increased significantly by 16% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to R M Drip and Sprinklers Systems' ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Is ROE Calculated?

ROE 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 amount earned after tax over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.14.

Check out our latest analysis for R M Drip and Sprinklers Systems

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

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. However, given that the company's ROE is similar to the average industry ROE of 15%, we may spare it some thought. Moreover, we are quite pleased to see that R M Drip and Sprinklers Systems' net income grew significantly at a rate of 49% over the last five years. 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. Such as - high earnings retention or an efficient management in place.

As a next step, we compared R M Drip and Sprinklers Systems' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 26%.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is R M Drip and Sprinklers Systems fairly valued compared to other companies? These 3 valuation measures might help you decide.

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 to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Summary

Overall, we feel that R M Drip and Sprinklers Systems certainly does have some positive factors to consider. 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 3 risks we have identified for R M Drip and Sprinklers Systems 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.