Are Ramkrishna Forgings Limited's (NSE:RKFORGE) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

Ramkrishna Forgings (NSE:RKFORGE) has had a rough three months with its share price down 14%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Ramkrishna Forgings' ROE in this article.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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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 Ramkrishna Forgings is:

7.3% = ₹2.2b ÷ ₹31b (Based on the trailing twelve months to September 2025).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.07 in profit.

View our latest analysis for Ramkrishna Forgings

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Ramkrishna Forgings' Earnings Growth And 7.3% ROE

It is quite clear that Ramkrishna Forgings' ROE is rather low. Even when compared to the industry average of 9.7%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Ramkrishna Forgings grew its net income at a significant rate of 31% 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.

We then compared Ramkrishna Forgings' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 24% 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. What is RKFORGE worth today? The intrinsic value infographic in our free research report helps visualize whether RKFORGE is currently mispriced by the market.

Is Ramkrishna Forgings Efficiently Re-investing Its Profits?

Ramkrishna Forgings has a really low three-year median payout ratio of 9.6%, meaning that it has the remaining 90% left over to reinvest into its business. So it looks like Ramkrishna Forgings is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Ramkrishna Forgings 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. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 12% over the next three years. However, Ramkrishna Forgings' future ROE is expected to rise to 11% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Conclusion

On the whole, we do feel that Ramkrishna Forgings 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.