Is Kanoria Chemicals & Industries Limited's (NSE:KANORICHEM) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

By
Simply Wall St
Published
January 13, 2022
NSEI:KANORICHEM
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Kanoria Chemicals & Industries' (NSE:KANORICHEM) stock is up by a considerable 12% 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. Specifically, we decided to study Kanoria Chemicals & Industries' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Kanoria Chemicals & Industries

How To Calculate Return On Equity?

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 Kanoria Chemicals & Industries is:

7.3% = ₹432m ÷ ₹5.9b (Based on the trailing twelve months to September 2021).

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.

Why Is ROE Important For Earnings Growth?

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

Kanoria Chemicals & Industries' Earnings Growth And 7.3% ROE

It is hard to argue that Kanoria Chemicals & Industries' ROE is much good in and of itself. Not just that, even compared to the industry average of 15%, the company's ROE is entirely unremarkable. However, we we're pleasantly surprised to see that Kanoria Chemicals & Industries grew its net income at a significant rate of 26% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Kanoria Chemicals & Industries' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 19%.

past-earnings-growth
NSEI:KANORICHEM Past Earnings Growth January 13th 2022

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Kanoria Chemicals & Industries fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Kanoria Chemicals & Industries Efficiently Re-investing Its Profits?

Kanoria Chemicals & Industries doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

Overall, we feel that Kanoria Chemicals & Industries certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. 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. You can see the 1 risk we have identified for Kanoria Chemicals & Industries by visiting our risks dashboard for free on our platform here.

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