Declining Stock and Decent Financials: Is The Market Wrong About Usha Martin Education & Solutions Limited (NSE:UMESLTD)?

Usha Martin Education & Solutions (NSE:UMESLTD) has had a rough three months with its share price down 13%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Usha Martin Education & Solutions' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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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 Usha Martin Education & Solutions is:

0.9% = ₹1.4m ÷ ₹143m (Based on the trailing twelve months to December 2024).

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 ₹0.01 in profit.

Check out our latest analysis for Usha Martin Education & Solutions

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. 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.

A Side By Side comparison of Usha Martin Education & Solutions' Earnings Growth And 0.9% ROE

As you can see, Usha Martin Education & Solutions' ROE looks pretty weak. Even compared to the average industry ROE of 12%, the company's ROE is quite dismal. However, we we're pleasantly surprised to see that Usha Martin Education & Solutions grew its net income at a significant rate of 34% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Usha Martin Education & Solutions' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 41% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Usha Martin Education & Solutions''s valuation, check out this gauge of its price-to-earnings ratio , as compared to its industry.

Is Usha Martin Education & Solutions Using Its Retained Earnings Effectively?

Usha Martin Education & Solutions doesn't pay any regular dividends to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Summary

In total, it does look like Usha Martin Education & Solutions has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 3 risks we have identified for Usha Martin Education & Solutions.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.