Radhika Jeweltech Limited's (NSE:RADHIKAJWE) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that Radhika Jeweltech's (NSE:RADHIKAJWE) stock increased significantly by 50% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Radhika Jeweltech's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Radhika Jeweltech

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 Radhika Jeweltech is:

18% = ₹434m ÷ ₹2.4b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.18 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Radhika Jeweltech's Earnings Growth And 18% ROE

To start with, Radhika Jeweltech's ROE looks acceptable. Especially when compared to the industry average of 14% the company's ROE looks pretty impressive. This probably laid the ground for Radhika Jeweltech's significant 31% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Radhika Jeweltech's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 29% in the same 5-year 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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Radhika Jeweltech is trading on a high P/E or a low P/E, relative to its industry.

Is Radhika Jeweltech Using Its Retained Earnings Effectively?

Radhika Jeweltech's ' three-year median payout ratio is on the lower side at 8.0% implying that it is retaining a higher percentage (92%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

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.

Conclusion

In total, we are pretty happy with Radhika Jeweltech's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial 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 would have the 3 risks 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.