Rajshree Polypack Limited's (NSE:RPPL) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Most readers would already be aware that Rajshree Polypack's (NSE:RPPL) stock increased significantly by 17% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Rajshree Polypack's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Rajshree Polypack

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 Rajshree Polypack is:

7.0% = ₹72m ÷ ₹1.0b (Based on the trailing twelve months to September 2020).

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 ₹0.07.

What Has ROE Got To Do With Earnings Growth?

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

Rajshree Polypack's Earnings Growth And 7.0% ROE

As you can see, Rajshree Polypack's ROE looks pretty weak. Not just that, even compared to the industry average of 10%, the company's ROE is entirely unremarkable. Hence, the flat earnings seen by Rajshree Polypack over the past five years could probably be the result of it having a lower ROE.

We then compared Rajshree Polypack's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 10% in the same period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Rajshree Polypack's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Rajshree Polypack Making Efficient Use Of Its Profits?

Rajshree Polypack has a low three-year median payout ratio of 15% (or a retention ratio of 85%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

In addition, Rajshree Polypack only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Conclusion

Overall, we have mixed feelings about Rajshree Polypack. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Rajshree Polypack's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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This article by Simply Wall St is general in nature. 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.
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