Is Cello World Limited's (NSE:CELLO) Recent Stock Performance Tethered To Its Strong Fundamentals?

Cello World's (NSE:CELLO) stock is up by a considerable 6.8% over the past month. 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. Specifically, we decided to study Cello World's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How To Calculate Return On Equity?

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 Cello World is:

15% = ₹3.6b ÷ ₹24b (Based on the trailing twelve months to March 2025).

The 'return' is the amount earned after tax over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.15 in profit.

Check out our latest analysis for Cello World

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. 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 Cello World's Earnings Growth And 15% ROE

To start with, Cello World's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 8.6%. Probably as a result of this, Cello World was able to see a decent growth of 18% over the last five years.

Next, on comparing Cello World's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 17% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. 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 Cello World is trading on a high P/E or a low P/E, relative to its industry.

Is Cello World Using Its Retained Earnings Effectively?

In Cello World's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 9.6% (or a retention ratio of 90%), which suggests that the company is investing most of its profits to grow its business.

While Cello World has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 10%. As a result, Cello World's ROE is not expected to change by much either, which we inferred from the analyst estimate of 18% for future ROE.

Conclusion

Overall, we are quite pleased with Cello World's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.