Manoj Vaibhav Gems 'N' Jewellers Limited (NSE:MVGJL) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

Manoj Vaibhav Gems 'N' Jewellers (NSE:MVGJL) has had a rough week with its share price down 10%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Manoj Vaibhav Gems 'N' Jewellers' ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Manoj Vaibhav Gems 'N' Jewellers

How Is ROE Calculated?

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 Manoj Vaibhav Gems 'N' Jewellers is:

13% = ₹880m ÷ ₹6.7b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.13 in profit.

What Is The Relationship Between ROE And 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 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.

Manoj Vaibhav Gems 'N' Jewellers' Earnings Growth And 13% ROE

On the face of it, Manoj Vaibhav Gems 'N' Jewellers' ROE is not much to talk about. However, its ROE is similar to the industry average of 11%, so we won't completely dismiss the company. Particularly, the exceptional 26% net income growth seen by Manoj Vaibhav Gems 'N' Jewellers over the past five years is pretty remarkable. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Manoj Vaibhav Gems 'N' Jewellers' 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 31% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Manoj Vaibhav Gems 'N' Jewellers is trading on a high P/E or a low P/E, relative to its industry.

Is Manoj Vaibhav Gems 'N' Jewellers Making Efficient Use Of Its Profits?

Manoj Vaibhav Gems 'N' Jewellers doesn't pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

On the whole, we do feel that Manoj Vaibhav Gems 'N' Jewellers has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 1 risk we have identified for Manoj Vaibhav Gems 'N' Jewellers visit our risks dashboard for free.

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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.