Declining Stock and Solid Fundamentals: Is The Market Wrong About Radhika Jeweltech Limited (NSE:RADHIKAJWE)?

Radhika Jeweltech (NSE:RADHIKAJWE) has had a rough three months with its share price down 12%. 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 Radhika Jeweltech's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

Our analysis indicates that RADHIKAJWE is potentially undervalued!

How Is ROE Calculated?

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 Radhika Jeweltech is:

18% = ₹345m ÷ ₹1.9b (Based on the trailing twelve months to June 2022).

The 'return' is the yearly profit. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.18 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. 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.

Radhika Jeweltech's Earnings Growth And 18% ROE

To start with, Radhika Jeweltech's ROE looks acceptable. On comparing with the average industry ROE of 9.3% the company's ROE looks pretty remarkable. This certainly adds some context to Radhika Jeweltech's exceptional 29% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared Radhika Jeweltech's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 18% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Radhika Jeweltech fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Radhika Jeweltech Using Its Retained Earnings Effectively?

Radhika Jeweltech's ' three-year median payout ratio is on the lower side at 10% implying that it is retaining a higher percentage (90%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Additionally, Radhika Jeweltech has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Radhika Jeweltech's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 3 risks we have identified for Radhika Jeweltech 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.