Declining Stock and Decent Financials: Is The Market Wrong About FSN E-Commerce Ventures Limited (NSE:NYKAA)?

With its stock down 14% over the past three months, it is easy to disregard FSN E-Commerce Ventures (NSE:NYKAA). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to FSN E-Commerce Ventures' 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.

View our latest analysis for FSN E-Commerce Ventures

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for FSN E-Commerce Ventures is:

1.9% = ₹263m ÷ ₹14b (Based on the trailing twelve months to December 2022).

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 ₹0.02 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

FSN E-Commerce Ventures' Earnings Growth And 1.9% ROE

As you can see, FSN E-Commerce Ventures' ROE looks pretty weak. Even when compared to the industry average of 9.5%, the ROE figure is pretty disappointing. In spite of this, FSN E-Commerce Ventures was able to grow its net income considerably, at a rate of 38% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared FSN E-Commerce Ventures' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 21%.

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. Is FSN E-Commerce Ventures fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is FSN E-Commerce Ventures Efficiently Re-investing Its Profits?

Given that FSN E-Commerce Ventures doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Summary

In total, it does look like FSN E-Commerce Ventures has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.