Stock Analysis

EIH Associated Hotels Limited (NSE:EIHAHOTELS) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

NSEI:EIHAHOTELS
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It is hard to get excited after looking at EIH Associated Hotels' (NSE:EIHAHOTELS) recent performance, when its stock has declined 9.1% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study EIH Associated Hotels' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for EIH Associated Hotels

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 EIH Associated Hotels is:

6.1% = ₹210m ÷ ₹3.5b (Based on the trailing twelve months to June 2020).

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 ₹0.06.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

EIH Associated Hotels' Earnings Growth And 6.1% ROE

It is quite clear that EIH Associated Hotels' ROE is rather low. Still, the company's ROE is higher than the average industry ROE of 4.6% so that's certainly interesting. However, EIH Associated Hotels has seen a flattish net income growth over the past five years, which is not saying much. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the low to flat growth in earnings could also be the result of this.

Next, on comparing with the industry net income growth, we found that EIH Associated Hotels' reported growth was lower than the industry growth of 14% in the same period, which is not something we like to see.

past-earnings-growth
NSEI:EIHAHOTELS Past Earnings Growth October 21st 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 EIH Associated Hotels''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is EIH Associated Hotels Using Its Retained Earnings Effectively?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, it does look like EIH Associated Hotels has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on EIH Associated Hotels 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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