Has The Peria Karamalai Tea and Produce Company Limited's (NSE:PKTEA) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Peria Karamalai Tea and Produce (NSE:PKTEA) has had a great run on the share market with its stock up by a significant 19% over the last month. 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. Specifically, we decided to study Peria Karamalai Tea and Produce'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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 Peria Karamalai Tea and Produce is:

3.7% = ₹73m ÷ ₹2.0b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.04 in profit.

See our latest analysis for Peria Karamalai Tea and Produce

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. 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 Peria Karamalai Tea and Produce's Earnings Growth And 3.7% ROE

As you can see, Peria Karamalai Tea and Produce's ROE looks pretty weak. Even compared to the average industry ROE of 10%, the company's ROE is quite dismal. Although, we can see that Peria Karamalai Tea and Produce saw a modest net income growth of 7.2% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Peria Karamalai Tea and Produce'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 16% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Peria Karamalai Tea and Produce fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Peria Karamalai Tea and Produce Making Efficient Use Of Its Profits?

Peria Karamalai Tea and Produce has a low three-year median payout ratio of 5.8%, meaning that the company retains the remaining 94% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Moreover, Peria Karamalai Tea and Produce 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.

Summary

On the whole, we do feel that Peria Karamalai Tea and Produce has some positive attributes. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. 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. To know the 2 risks we have identified for Peria Karamalai Tea and Produce visit our risks dashboard for free.

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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.