Emmbi Industries Limited's (NSE:EMMBI) Stock Is Going Strong: Have Financials A Role To Play?

Most readers would already be aware that Emmbi Industries' (NSE:EMMBI) stock increased significantly by 7.4% over the past 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. Particularly, we will be paying attention to Emmbi Industries' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Emmbi Industries

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Emmbi Industries is:

7.4% = ₹96m ÷ ₹1.3b (Based on the trailing twelve months to September 2020).

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 ₹0.07 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Emmbi Industries' Earnings Growth And 7.4% ROE

It is quite clear that Emmbi Industries' ROE is rather low. Even when compared to the industry average of 9.4%, the ROE figure is pretty disappointing. Emmbi Industries was still able to see a decent net income growth of 6.8% over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Emmbi Industries' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 10% in the same period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Emmbi Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Emmbi Industries Efficiently Re-investing Its Profits?

Emmbi Industries' three-year median payout ratio to shareholders is 5.0% (implying that it retains 95% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, Emmbi Industries has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, it does look like Emmbi Industries has some positive aspects to its business. 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. Our risks dashboard would have the 4 risks we have identified for Emmbi Industries.

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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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