Are Robust Financials Driving The Recent Rally In Urban Enviro Waste Management Limited's (NSE:URBAN) Stock?

Most readers would already be aware that Urban Enviro Waste Management's (NSE:URBAN) stock increased significantly by 25% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Urban Enviro Waste Management's 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Urban Enviro Waste Management

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 Urban Enviro Waste Management is:

37% = ₹107m ÷ ₹293m (Based on the trailing twelve months to September 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 ₹0.37.

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. 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.

A Side By Side comparison of Urban Enviro Waste Management's Earnings Growth And 37% ROE

Firstly, we acknowledge that Urban Enviro Waste Management has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 12% which is quite remarkable. So, the substantial 47% net income growth seen by Urban Enviro Waste Management over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Urban Enviro Waste Management's growth is quite high when compared to the industry average growth of 30% 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. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Urban Enviro Waste Management fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Urban Enviro Waste Management Efficiently Re-investing Its Profits?

Summary

Overall, we are quite pleased with Urban Enviro Waste Management's performance. 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 2 risks we have identified for Urban Enviro Waste Management 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.