Will Weakness in Indo Borax & Chemicals Limited's (NSE:INDOBORAX) Stock Prove Temporary Given Strong Fundamentals?

Indo Borax & Chemicals (NSE:INDOBORAX) has had a rough three months with its share price down 19%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Indo Borax & Chemicals' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Indo Borax & Chemicals

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 Indo Borax & Chemicals is:

14% = ₹437m ÷ ₹3.2b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.14.

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. 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.

Indo Borax & Chemicals' Earnings Growth And 14% ROE

When you first look at it, Indo Borax & Chemicals' ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 10%, is definitely interesting. Consequently, this likely laid the ground for the decent growth of 15% seen over the past five years by Indo Borax & Chemicals. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence there might be some other aspects that are causing earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Indo Borax & Chemicals' growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Indo Borax & Chemicals''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Indo Borax & Chemicals Using Its Retained Earnings Effectively?

Indo Borax & Chemicals has a low three-year median payout ratio of 8.2%, meaning that the company retains the remaining 92% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Moreover, Indo Borax & Chemicals is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

In total, we are pretty happy with Indo Borax & Chemicals' performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 2 risks we have identified for Indo Borax & 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.