Can Mixed Fundamentals Have A Negative Impact on Camlin Fine Sciences Limited (NSE:CAMLINFINE) Current Share Price Momentum?

Camlin Fine Sciences' (NSE:CAMLINFINE) stock is up by a considerable 22% 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 Camlin Fine Sciences' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Camlin Fine Sciences

How To 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 Camlin Fine Sciences is:

6.5% = ₹361m ÷ ₹5.5b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.07 in profit.

What Is The Relationship Between ROE And 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. 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 Camlin Fine Sciences' Earnings Growth And 6.5% ROE

As you can see, Camlin Fine Sciences' ROE looks pretty weak. Even when compared to the industry average of 11%, the ROE figure is pretty disappointing. As a result, Camlin Fine Sciences' flat earnings over the past five years doesn't come as a surprise given its lower ROE.

As a next step, we compared Camlin Fine Sciences' net income growth with the industry and discovered that the industry saw an average growth of 15% in the same period.

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. Is Camlin Fine Sciences fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Camlin Fine Sciences Using Its Retained Earnings Effectively?

Camlin Fine Sciences doesn't pay any dividend, meaning that the company is keeping all of its profits, which makes us wonder why it is retaining its earnings if it can't use them to grow its business. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Conclusion

Overall, we have mixed feelings about Camlin Fine Sciences. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Up till now, we've only made a short study of the company's growth data. To gain further insights into Camlin Fine Sciences' past profit growth, check out this visualization 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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