Can Mixed Fundamentals Have A Negative Impact on Pil Italica Lifestyle Limited (NSE:PILITA) Current Share Price Momentum?

Pil Italica Lifestyle's (NSE:PILITA) stock is up by a considerable 69% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Pil Italica Lifestyle's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Pil Italica Lifestyle

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 Pil Italica Lifestyle is:

1.8% = ₹11m ÷ ₹608m (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.02 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. 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. 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.

Pil Italica Lifestyle's Earnings Growth And 1.8% ROE

As you can see, Pil Italica Lifestyle's ROE looks pretty weak. Not just that, even compared to the industry average of 8.0%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 8.8% seen by Pil Italica Lifestyle over the last five years is not surprising. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

So, as a next step, we compared Pil Italica Lifestyle's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 12% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Pil Italica Lifestyle fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Pil Italica Lifestyle Using Its Retained Earnings Effectively?

Summary

Overall, we have mixed feelings about Pil Italica Lifestyle. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. 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 4 risks we have identified for Pil Italica Lifestyle by visiting our risks dashboard for free on our platform here.

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