Essen Speciality Films Limited's (NSE:ESFL) Stock Is Going Strong: Have Financials A Role To Play?

Essen Speciality Films (NSE:ESFL) has had a great run on the share market with its stock up by a significant 153% over the last month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Essen Speciality Films' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 Essen Speciality Films

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Essen Speciality Films is:

9.1% = ₹130m ÷ ₹1.4b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.09 in profit.

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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Essen Speciality Films' Earnings Growth And 9.1% ROE

When you first look at it, Essen Speciality Films' ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 9.2%, we may spare it some thought. Even so, Essen Speciality Films has shown a fairly decent growth in its net income which grew at a rate of 18%. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Essen Speciality Films' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 18% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Essen Speciality Films''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Essen Speciality Films Efficiently Re-investing Its Profits?

Essen Speciality Films has a low three-year median payout ratio of 10%, meaning that the company retains the remaining 90% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Summary

In total, it does look like Essen Speciality Films has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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. You can see the 1 risk we have identified for Essen Speciality Films by visiting our risks dashboard for free on our platform here.

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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.