Is Mallcom (India) Limited's (NSE:MALLCOM) Latest Stock Performance A Reflection Of Its Financial Health?

Mallcom (India)'s (NSE:MALLCOM) stock is up by a considerable 56% over the past three months. 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 Mallcom (India)'s ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Mallcom (India)

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 Mallcom (India) is:

15% = ₹363m ÷ ₹2.4b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.15.

What Has ROE Got To Do With 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Mallcom (India)'s Earnings Growth And 15% ROE

To begin with, Mallcom (India) seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 13%. This certainly adds some context to Mallcom (India)'s moderate 17% net income growth seen over the past five years.

Next, on comparing Mallcom (India)'s net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 21% over the last few years.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Mallcom (India)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Mallcom (India) Using Its Retained Earnings Effectively?

In Mallcom (India)'s case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 5.2% (or a retention ratio of 95%), which suggests that the company is investing most of its profits to grow its business.

Additionally, Mallcom (India) has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Mallcom (India)'s 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 will have the 1 risk we have identified for Mallcom (India).

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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.