Chemcon Speciality Chemicals Limited's (NSE:CHEMCON) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Chemcon Speciality Chemicals (NSE:CHEMCON) has had a great run on the share market with its stock up by a significant 14% over the last month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Chemcon Speciality Chemicals' 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Chemcon Speciality Chemicals

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 Chemcon Speciality Chemicals is:

7.2% = ₹337m ÷ ₹4.7b (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.07.

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. 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 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 Chemcon Speciality Chemicals' Earnings Growth And 7.2% ROE

It is hard to argue that Chemcon Speciality Chemicals' ROE is much good in and of itself. Even compared to the average industry ROE of 11%, the company's ROE is quite dismal. Accordingly, Chemcon Speciality Chemicals' low net income growth of 2.9% over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Chemcon Speciality Chemicals' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 17% in the same 5-year period, which is a bit concerning.

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. 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 Chemcon Speciality Chemicals is trading on a high P/E or a low P/E, relative to its industry.

Is Chemcon Speciality Chemicals Making Efficient Use Of Its Profits?

Summary

On the whole, we feel that the performance shown by Chemcon Speciality Chemicals can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 3 risks we have identified for Chemcon Speciality Chemicals.

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.