Is Weakness In The Phoenix Mills Limited (NSE:PHOENIXLTD) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 13% over the past month, it is easy to disregard Phoenix Mills (NSE:PHOENIXLTD). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Phoenix Mills' ROE in this article.

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.

Check out our latest analysis for Phoenix Mills

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 Phoenix Mills is:

10% = ₹13b ÷ ₹133b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Phoenix Mills' Earnings Growth And 10% ROE

When you first look at it, Phoenix Mills' ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 8.0% doesn't go unnoticed by us. Even more so after seeing Phoenix Mills' exceptional 36% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So, there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing with the industry net income growth, we found that Phoenix Mills' growth is quite high when compared to the industry average growth of 29% in the same period, which is great 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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Phoenix Mills''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Phoenix Mills Using Its Retained Earnings Effectively?

Phoenix Mills has a really low three-year median payout ratio of 8.1%, meaning that it has the remaining 92% left over to reinvest into its business. So it looks like Phoenix Mills is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Phoenix Mills 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 8.4% of its profits over the next three years. However, Phoenix Mills' ROE is predicted to rise to 14% despite there being no anticipated change in its payout ratio.

Summary

In total, we are pretty happy with Phoenix Mills' performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.