Mohini Health & Hygiene Limited (NSE:MHHL) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Mohini Health & Hygiene's (NSE:MHHL) stock is up by a considerable 20% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Mohini Health & Hygiene's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Mohini Health & Hygiene

How Is ROE Calculated?

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 Mohini Health & Hygiene is:

7.6% = ₹68m ÷ ₹897m (Based on the trailing twelve months to March 2023).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.08 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Mohini Health & Hygiene's Earnings Growth And 7.6% ROE

It is hard to argue that Mohini Health & Hygiene's ROE is much good in and of itself. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 7.9%. Thus, the low ROE provides some context to Mohini Health & Hygiene's flat net income growth over the past five years.

Next, on comparing with the industry net income growth, we found that Mohini Health & Hygiene's reported growth was lower than the industry growth of 25% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Mohini Health & Hygiene is trading on a high P/E or a low P/E, relative to its industry.

Is Mohini Health & Hygiene Making Efficient Use Of Its Profits?

Mohini Health & Hygiene doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business. However, this doesn't explain why the company hasn't seen any growth. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Summary

On the whole, we feel that the performance shown by Mohini Health & Hygiene can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Mohini Health & Hygiene and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.