Could The Market Be Wrong About Bodhi Tree Multimedia Limited (NSE:BTML) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Bodhi Tree Multimedia's (NSE:BTML) recent performance, when its stock has declined 11% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Bodhi Tree Multimedia's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Bodhi Tree Multimedia

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 Bodhi Tree Multimedia is:

21% = ₹57m ÷ ₹265m (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.21 in profit.

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. 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.

A Side By Side comparison of Bodhi Tree Multimedia's Earnings Growth And 21% ROE

To start with, Bodhi Tree Multimedia's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 6.7%. This certainly adds some context to Bodhi Tree Multimedia's exceptional 20% net income growth seen over the past five years. We believe that there might also 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.

As a next step, we compared Bodhi Tree Multimedia's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 18% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Bodhi Tree Multimedia's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Bodhi Tree Multimedia Making Efficient Use Of Its Profits?

The three-year median payout ratio for Bodhi Tree Multimedia is 30%, which is moderately low. The company is retaining the remaining 70%. By the looks of it, the dividend is well covered and Bodhi Tree Multimedia is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Bodhi Tree Multimedia is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Conclusion

In total, we are pretty happy with Bodhi Tree Multimedia's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for Bodhi Tree Multimedia.

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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.