Has Monte Carlo Fashions Limited's (NSE:MONTECARLO) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Monte Carlo Fashions' (NSE:MONTECARLO) stock is up by a considerable 45% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Monte Carlo Fashions' 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Monte Carlo Fashions

How Do You 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 Monte Carlo Fashions is:

9.9% = ₹529m ÷ ₹5.4b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.10.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Monte Carlo Fashions' Earnings Growth And 9.9% ROE

At first glance, Monte Carlo Fashions' ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 5.5% which we definitely can't overlook. Still, Monte Carlo Fashions has seen a flat net income growth over the past five years. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. So that could be one of the factors that are causing earnings growth to stay flat.

We then compared Monte Carlo Fashions' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 6.8% in the same period, which is a bit concerning.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Monte Carlo Fashions fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Monte Carlo Fashions Using Its Retained Earnings Effectively?

In spite of a normal three-year median payout ratio of 27% (or a retention ratio of 73%), Monte Carlo Fashions hasn't seen much growth in its earnings. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Additionally, Monte Carlo Fashions has paid dividends over a period of six years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we feel that Monte Carlo Fashions certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Monte Carlo Fashions and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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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