Is Advani Hotels & Resorts (India) Limited's (NSE:ADVANIHOTR) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Advani Hotels & Resorts (India)'s (NSE:ADVANIHOTR) stock is up by a considerable 22% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Advani Hotels & Resorts (India)'s ROE today.

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.

View our latest analysis for Advani Hotels & Resorts (India)

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 Advani Hotels & Resorts (India) is:

6.0% = ₹23m ÷ ₹387m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax 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 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. 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.

A Side By Side comparison of Advani Hotels & Resorts (India)'s Earnings Growth And 6.0% ROE

It is quite clear that Advani Hotels & Resorts (India)'s ROE is rather low. However, the fact that it is higher than the industry average of 4.0% makes us a bit more interested. Particularly, the modest 5.8% net income growth seen by Advani Hotels & Resorts (India) over the past five years is a positive. That being said, the company does have a low ROE to begin with, just that its higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. Such as high earnings retention or an efficient management in place.

As a next step, we compared Advani Hotels & Resorts (India)'s net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 11% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Advani Hotels & Resorts (India) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Advani Hotels & Resorts (India) Efficiently Re-investing Its Profits?

Advani Hotels & Resorts (India) has a significant three-year median payout ratio of 75%, meaning that it is left with only 25% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Besides, Advani Hotels & Resorts (India) has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we do feel that Advani Hotels & Resorts (India) has some positive attributes. While no doubt its earnings growth is pretty decent, we do feel that the reinvestment rate is pretty low. Meaning, the earnings growth number could have been significantly higher, had the company been retaining more of its profits. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Advani Hotels & Resorts (India) 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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