Is Jakharia Fabric Limited's (NSE:JAKHARIA) Stock Price Struggling As A Result Of Its Mixed Financials?

With its stock down 5.9% over the past three months, it is easy to disregard Jakharia Fabric (NSE:JAKHARIA). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Jakharia Fabric's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Jakharia Fabric

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Jakharia Fabric is:

6.5% = ₹31m ÷ ₹471m (Based on the trailing twelve months to March 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.06 in profit.

What Is The Relationship Between ROE And 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 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 Jakharia Fabric's Earnings Growth And 6.5% ROE

It is quite clear that Jakharia Fabric's ROE is rather low. Further, we noted that the company's ROE is similar to the industry average of 5.6%. Given the circumstances, the significant decline in net income by 9.0% seen by Jakharia Fabric over the last five years is not surprising.

That being said, we compared Jakharia Fabric's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 6.8% in the same period.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Jakharia Fabric fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jakharia Fabric Making Efficient Use Of Its Profits?

Conclusion

In total, we're a bit ambivalent about Jakharia Fabric's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 3 risks we have identified for Jakharia Fabric 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. 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.
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