Gujarat Raffia Industries Limited's (NSE:GUJRAFFIA) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

By
Simply Wall St
Published
March 16, 2022
NSEI:GUJRAFFIA
Source: Shutterstock

Most readers would already be aware that Gujarat Raffia Industries' (NSE:GUJRAFFIA) stock increased significantly by 10% over the past week. 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 Gujarat Raffia Industries' ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Gujarat Raffia Industries

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 Gujarat Raffia Industries is:

8.0% = ₹15m ÷ ₹187m (Based on the trailing twelve months to December 2021).

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 ₹0.08 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Gujarat Raffia Industries' Earnings Growth And 8.0% ROE

It is hard to argue that Gujarat Raffia Industries' ROE is much good in and of itself. Even when compared to the industry average of 12%, the ROE figure is pretty disappointing. Gujarat Raffia Industries was still able to see a decent net income growth of 6.8% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. 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.

As a next step, we compared Gujarat Raffia Industries' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 17% in the same period.

past-earnings-growth
NSEI:GUJRAFFIA Past Earnings Growth March 16th 2022

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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Gujarat Raffia Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Gujarat Raffia Industries Making Efficient Use Of Its Profits?

Given that Gujarat Raffia Industries doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Summary

In total, it does look like Gujarat Raffia Industries has some positive aspects to its business. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. 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. To know the 3 risks we have identified for Gujarat Raffia Industries visit our risks dashboard for free.

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