Is Radhika Jeweltech Limited's (NSE:RADHIKAJWE) Latest Stock Performance A Reflection Of Its Financial Health?

Radhika Jeweltech's (NSE:RADHIKAJWE) stock is up by a considerable 70% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Radhika Jeweltech's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Radhika Jeweltech

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% = ₹488m ÷ ₹2.6b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.18 in profit.

What Has ROE Got To Do With 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 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

At first glance, Radhika Jeweltech seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 14%. This probably laid the ground for Radhika Jeweltech's significant 30% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Radhika Jeweltech's 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. 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. If you're wondering about Radhika Jeweltech's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Radhika Jeweltech Making Efficient Use Of Its Profits?

Radhika Jeweltech's three-year median payout ratio to shareholders is 8.0%, which is quite low. This implies that the company is retaining 92% of its profits. So it looks like Radhika Jeweltech is reinvesting profits heavily to grow its business, which shows in its earnings growth.

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

Summary

Overall, we are quite pleased with Radhika Jeweltech's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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. Our risks dashboard will have the 1 risk we have identified for Radhika Jeweltech.

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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.