Shree Tirupati Balajee FIBC's (NSE:TIRUPATI) stock is up by a considerable 49% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Shree Tirupati Balajee FIBC's ROE today.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
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 Shree Tirupati Balajee FIBC is:
12% = ₹64m ÷ ₹513m (Based on the trailing twelve months to September 2021).
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 ₹0.12 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Shree Tirupati Balajee FIBC's Earnings Growth And 12% ROE
When you first look at it, Shree Tirupati Balajee FIBC's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 12%, so we won't completely dismiss the company. On the other hand, Shree Tirupati Balajee FIBC reported a fairly low 2.5% net income growth over the past five years. Bear in mind, the company's ROE is not very high . So this could also be one of the reasons behind the company's low growth in earnings.
Next, on comparing with the industry net income growth, we found that Shree Tirupati Balajee FIBC's reported growth was lower than the industry growth of 17% in the same period, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Shree Tirupati Balajee FIBC's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Shree Tirupati Balajee FIBC Using Its Retained Earnings Effectively?
Shree Tirupati Balajee FIBC doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. However, there's only been very little earnings growth to show for it. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Overall, we have mixed feelings about Shree Tirupati Balajee FIBC. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the 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. You can see the 3 risks we have identified for Shree Tirupati Balajee FIBC by visiting our risks dashboard for free on our platform here.
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.