Relaxo Footwears Limited's (NSE:RELAXO) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

By
Simply Wall St
Published
February 17, 2022
NSEI:RELAXO
Source: Shutterstock

It is hard to get excited after looking at Relaxo Footwears' (NSE:RELAXO) recent performance, when its stock has declined 4.7% over the past month. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Relaxo Footwears' 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Relaxo Footwears

How Do You 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 Relaxo Footwears is:

17% = ₹2.7b ÷ ₹16b (Based on the trailing twelve months to December 2021).

The 'return' refers to a company's earnings over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.17.

Why Is ROE Important For 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. 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 Relaxo Footwears' Earnings Growth And 17% ROE

At first glance, Relaxo Footwears seems to have a decent ROE. On comparing with the average industry ROE of 12% the company's ROE looks pretty remarkable. This certainly adds some context to Relaxo Footwears' decent 18% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Relaxo Footwears' growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

past-earnings-growth
NSEI:RELAXO Past Earnings Growth February 17th 2022

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. If you're wondering about Relaxo Footwears''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Relaxo Footwears Using Its Retained Earnings Effectively?

Relaxo Footwears' three-year median payout ratio to shareholders is 13% (implying that it retains 87% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Relaxo Footwears is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

In total, we are pretty happy with Relaxo Footwears' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings.

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