Rashtriya Chemicals and Fertilizers Limited (NSE:RCF) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Rashtriya Chemicals and Fertilizers' (NSE:RCF) stock is up by a considerable 14% over the past month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Rashtriya Chemicals and Fertilizers' 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Rashtriya Chemicals and Fertilizers is:

5.7% = ₹2.7b ÷ ₹46b (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 ₹0.06.

Check out our latest analysis for Rashtriya Chemicals and Fertilizers

What Has ROE Got To Do With 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Rashtriya Chemicals and Fertilizers' Earnings Growth And 5.7% ROE

As you can see, Rashtriya Chemicals and Fertilizers' ROE looks pretty weak. Even compared to the average industry ROE of 11%, the company's ROE is quite dismal. Accordingly, Rashtriya Chemicals and Fertilizers' low net income growth of 3.6% over the past five years can possibly be explained by the low ROE amongst other factors.

Next, on comparing with the industry net income growth, we found that Rashtriya Chemicals and Fertilizers' reported growth was lower than the industry growth of 12% over the last few years, which is not something we like 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. This then helps them determine if the stock is placed for a bright or bleak future. Is Rashtriya Chemicals and Fertilizers fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Rashtriya Chemicals and Fertilizers Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 30% (implying that the company retains the remaining 70% of its income), Rashtriya Chemicals and Fertilizers' earnings growth was quite low. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Rashtriya Chemicals and Fertilizers has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

On the whole, we feel that the performance shown by Rashtriya Chemicals and Fertilizers can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard will have the 1 risk we have identified for Rashtriya Chemicals and Fertilizers.

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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.