Tara Chand Logistic Solutions Limited's (NSE:TARACHAND) Stock Is Going Strong: Is the Market Following Fundamentals?

Tara Chand Logistic Solutions' (NSE:TARACHAND) stock is up by a considerable 10% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Tara Chand Logistic Solutions' 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.

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How To 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 Tara Chand Logistic Solutions is:

25% = ₹233m ÷ ₹949m (Based on the trailing twelve months to December 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 ₹0.25.

See our latest analysis for Tara Chand Logistic Solutions

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

A Side By Side comparison of Tara Chand Logistic Solutions' Earnings Growth And 25% ROE

At first glance, Tara Chand Logistic Solutions seems to have a decent ROE. On comparing with the average industry ROE of 5.9% the company's ROE looks pretty remarkable. This probably laid the ground for Tara Chand Logistic Solutions' significant 38% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings 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.

We then compared Tara Chand Logistic Solutions' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 27% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Tara Chand Logistic Solutions fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tara Chand Logistic Solutions Using Its Retained Earnings Effectively?

Tara Chand Logistic Solutions has a really low three-year median payout ratio of 7.0%, meaning that it has the remaining 93% left over to reinvest into its business. So it looks like Tara Chand Logistic Solutions is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Tara Chand Logistic Solutions is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend.

Summary

On the whole, we feel that Tara Chand Logistic Solutions' performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 3 risks we have identified for Tara Chand Logistic Solutions.

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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.