This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Kewal Kiran Clothing Limited (BOM:532732).
With an ROE of 18.33%, Kewal Kiran Clothing Limited (BOM:532732) outpaced its own industry which delivered a less exciting 7.55% over the past year. However, whether this above-industry ROE is actually impressive depends on if it can be maintained. This can be measured by looking at the company’s financial leverage. With more debt, 532732 can invest even more and earn more money, thus pushing up its returns. However, ROE only measures returns against equity, not debt. This can be distorted, so let’s take a look at it further. See our latest analysis for Kewal Kiran Clothing
Peeling the layers of ROE – trisecting a company’s profitability
Return on Equity (ROE) is a measure of Kewal Kiran Clothing’s profit relative to its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. Investors that are diversifying their portfolio based on industry may want to maximise their return in the Apparel, Accessories and Luxury Goods sector by choosing the highest returning stock. But this can be misleading as each company has different costs of equity and also varying debt levels, which could artificially push up ROE whilst accumulating high interest expense.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of Kewal Kiran Clothing’s equity capital deployed. Its cost of equity is 13.55%. Since Kewal Kiran Clothing’s return covers its cost in excess of 4.79%, its use of equity capital is efficient and likely to be sustainable. Simply put, Kewal Kiran Clothing pays less for its capital than what it generates in return. ROE can be split up into three useful ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. Asset turnover shows how much revenue Kewal Kiran Clothing can generate with its current asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. ROE can be inflated by disproportionately high levels of debt. This is also unsustainable due to the high interest cost that the company will also incur. Thus, we should look at Kewal Kiran Clothing’s debt-to-equity ratio to examine sustainability of its returns. The most recent ratio is 12.10%, which is sensible and indicates Kewal Kiran Clothing has not taken on too much leverage. Thus, we can conclude its above-average ROE is generated from its capacity to increase profit without a large debt burden.
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Kewal Kiran Clothing exhibits a strong ROE against its peers, as well as sufficient returns to cover its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. Although ROE can be a useful metric, it is only a small part of diligent research.
For Kewal Kiran Clothing, I’ve compiled three pertinent factors you should look at:
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Valuation: What is Kewal Kiran Clothing worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Kewal Kiran Clothing is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Kewal Kiran Clothing? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!