Are Strong Financial Prospects The Force That Is Driving The Momentum In JK Paper Limited's NSE:JKPAPER) Stock?

JK Paper's (NSE:JKPAPER) stock is up by a considerable 8.0% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on JK Paper's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for JK Paper

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for JK Paper is:

31% = ₹11b ÷ ₹35b (Based on the trailing twelve months to December 2022).

The 'return' is the yearly profit. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.31.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

JK Paper's Earnings Growth And 31% ROE

Firstly, we acknowledge that JK Paper has a significantly high ROE. Secondly, even when compared to the industry average of 15% the company's ROE is quite impressive. Under the circumstances, JK Paper's considerable five year net income growth of 22% was to be expected.

Next, on comparing with the industry net income growth, we found that JK Paper's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for JKPAPER? You can find out in our latest intrinsic value infographic research report.

Is JK Paper Making Efficient Use Of Its Profits?

JK Paper's three-year median payout ratio to shareholders is 16%, which is quite low. This implies that the company is retaining 84% of its profits. So it looks like JK Paper is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, JK Paper 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. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 20% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 21%, over the same period.

Summary

In total, we are pretty happy with JK Paper's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.