Manoj Vaibhav Gems 'N' Jewellers Limited's (NSE:MVGJL) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Manoj Vaibhav Gems 'N' Jewellers (NSE:MVGJL) has had a rough three months with its share price down 19%. 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.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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

How Is ROE Calculated?

The formula for ROE is:

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% = ₹752m ÷ ₹5.8b (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.13 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

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. Yet, a closer study shows that the company's ROE is similar to the industry average of 14%. Particularly, the exceptional 26% net income growth seen by Manoj Vaibhav Gems 'N' Jewellers over the past five years is pretty remarkable. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

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 29% in the same period.

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 Manoj Vaibhav Gems 'N' Jewellers''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Manoj Vaibhav Gems 'N' Jewellers Efficiently Re-investing Its Profits?

Manoj Vaibhav Gems 'N' Jewellers doesn't pay any dividend 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. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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. Our risks dashboard will have the 1 risk we have identified for Manoj Vaibhav Gems 'N' Jewellers.

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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.