Are Bhandari Hosiery Exports Limited's (NSE:BHANDARI) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

Bhandari Hosiery Exports (NSE:BHANDARI) has had a rough month with its share price down 19%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Bhandari Hosiery Exports' ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Bhandari Hosiery Exports

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 Bhandari Hosiery Exports is:

4.3% = ₹65m ÷ ₹1.5b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.04.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Bhandari Hosiery Exports' Earnings Growth And 4.3% ROE

It is hard to argue that Bhandari Hosiery Exports' ROE is much good in and of itself. Even when compared to the industry average of 8.3%, the ROE figure is pretty disappointing. Bhandari Hosiery Exports was still able to see a decent net income growth of 13% over the past five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared Bhandari Hosiery Exports' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 21% in the same 5-year period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Bhandari Hosiery Exports is trading on a high P/E or a low P/E, relative to its industry.

Is Bhandari Hosiery Exports Using Its Retained Earnings Effectively?

In Bhandari Hosiery Exports' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 2.3% (or a retention ratio of 98%), which suggests that the company is investing most of its profits to grow its business.

Besides, Bhandari Hosiery Exports has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, it does look like Bhandari Hosiery Exports has some positive aspects to its business. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. 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 Bhandari Hosiery Exports 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.