Is Priti International Limited's(NSE:PRITI) Recent Stock Performance Tethered To Its Strong Fundamentals?

By
Simply Wall St
Published
November 08, 2021
NSEI:PRITI
Source: Shutterstock

Most readers would already be aware that Priti International's (NSE:PRITI) stock increased significantly by 47% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Priti International's ROE in this article.

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 Priti International

How To Calculate Return On Equity?

Return on equity 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 Priti International is:

17% = ₹31m ÷ ₹178m (Based on the trailing twelve months to March 2021).

The 'return' is the profit over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.17 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Priti International's Earnings Growth And 17% ROE

At first glance, Priti International seems to have a decent ROE. On comparing with the average industry ROE of 9.7% the company's ROE looks pretty remarkable. This certainly adds some context to Priti International's decent 15% net income growth seen over the past five years.

We then compared Priti International's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 3.8% in the same period.

past-earnings-growth
NSEI:PRITI Past Earnings Growth November 9th 2021

Earnings growth is a huge factor in stock valuation. 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 Priti International fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Priti International Using Its Retained Earnings Effectively?

Priti International's three-year median payout ratio to shareholders is 4.2% (implying that it retains 96% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Conclusion

On the whole, we feel that Priti International's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 4 risks we have identified for Priti International.

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