Declining Stock and Solid Fundamentals: Is The Market Wrong About Krishna Institute of Medical Sciences Limited (NSE:KIMS)?

With its stock down 4.4% over the past week, it is easy to disregard Krishna Institute of Medical Sciences (NSE:KIMS). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Krishna Institute of Medical Sciences' ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Krishna Institute of Medical Sciences

How Do You Calculate Return On Equity?

Return on equity 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 Krishna Institute of Medical Sciences is:

19% = ₹3.5b ÷ ₹19b (Based on the trailing twelve months to September 2022).

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 ₹0.19 in profit.

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. 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 Krishna Institute of Medical Sciences' Earnings Growth And 19% ROE

To begin with, Krishna Institute of Medical Sciences seems to have a respectable ROE. Especially when compared to the industry average of 14% the company's ROE looks pretty impressive. This probably laid the ground for Krishna Institute of Medical Sciences' significant 45% net income growth seen over the past five years. However, there could also be other causes behind this 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.

Next, on comparing with the industry net income growth, we found that Krishna Institute of Medical Sciences' growth is quite high when compared to the industry average growth of 30% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Krishna Institute of Medical Sciences fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Krishna Institute of Medical Sciences Making Efficient Use Of Its Profits?

Krishna Institute of Medical Sciences doesn't pay any dividend 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.

Conclusion

On the whole, we feel that Krishna Institute of Medical Sciences' performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.