Pondy Oxides And Chemicals Limited's (NSE:POCL) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Pondy Oxides And Chemicals' (NSE:POCL) stock is up by a considerable 113% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Pondy Oxides And 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Pondy Oxides And Chemicals

How Do You Calculate Return On Equity?

Return on equity 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 Pondy Oxides And Chemicals is:

11% = ₹407m ÷ ₹3.6b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.11.

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. 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.

Pondy Oxides And Chemicals' Earnings Growth And 11% ROE

On the face of it, Pondy Oxides And Chemicals' ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 13%. Particularly, the exceptional 28% net income growth seen by Pondy Oxides And Chemicals over the past five years is pretty remarkable. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between Pondy Oxides And Chemicals' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 28% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. 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 Pondy Oxides And Chemicals''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Pondy Oxides And Chemicals Making Efficient Use Of Its Profits?

Pondy Oxides And Chemicals has a really low three-year median payout ratio of 8.6%, meaning that it has the remaining 91% left over to reinvest into its business. So it looks like Pondy Oxides And Chemicals is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Pondy Oxides And Chemicals has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we do feel that Pondy Oxides And Chemicals has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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. Our risks dashboard would have the 4 risks we have identified for Pondy Oxides And Chemicals.

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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.