Is JK Lakshmi Cement Limited's (NSE:JKLAKSHMI) Stock's Recent Performance A Reflection Of Its Financial Health?

JK Lakshmi Cement's (NSE:JKLAKSHMI) stock up by 4.7% over the past week. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on JK Lakshmi Cement's ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Is ROE Calculated?

ROE 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 JK Lakshmi Cement is:

7.9% = ₹2.7b ÷ ₹34b (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.08 in profit.

See our latest analysis for JK Lakshmi Cement

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. 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.

JK Lakshmi Cement's Earnings Growth And 7.9% ROE

As you can see, JK Lakshmi Cement's ROE looks pretty weak. Still, the company's ROE is higher than the average industry ROE of 5.2% so that's certainly interesting. Particularly, the modest 5.5% net income growth seen by JK Lakshmi Cement over the past five years is a positive. That being said, the company does have a low ROE to begin with, just that its 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 company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that JK Lakshmi Cement's growth is quite high when compared to the industry average growth of 3.3% 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. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is JK Lakshmi Cement fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is JK Lakshmi Cement Using Its Retained Earnings Effectively?

JK Lakshmi Cement's three-year median payout ratio to shareholders is 14% (implying that it retains 86% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, JK Lakshmi Cement has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 13% of its profits over the next three years. However, JK Lakshmi Cement's ROE is predicted to rise to 14% despite there being no anticipated change in its payout ratio.

Summary

In total, we are pretty happy with JK Lakshmi Cement's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.