Are Shubhlaxmi Jewel Art Limited's (NSE:SHUBHLAXMI) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

With its stock down 40% over the past three months, it is easy to disregard Shubhlaxmi Jewel Art (NSE:SHUBHLAXMI). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Specifically, we decided to study Shubhlaxmi Jewel Art's ROE in this article.

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.

View our latest analysis for Shubhlaxmi Jewel Art

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Shubhlaxmi Jewel Art is:

7.0% = ₹15m ÷ ₹214m (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.07.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Shubhlaxmi Jewel Art's Earnings Growth And 7.0% ROE

As you can see, Shubhlaxmi Jewel Art's ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 6.9% either. Given the low ROE Shubhlaxmi Jewel Art's five year net income decline of 4.2% is not surprising.

However, when we compared Shubhlaxmi Jewel Art's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 32% in the same period. This is quite worrisome.

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). Doing so will help them establish if the stock's future looks promising or ominous. 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 Shubhlaxmi Jewel Art is trading on a high P/E or a low P/E, relative to its industry.

Is Shubhlaxmi Jewel Art Making Efficient Use Of Its Profits?

Shubhlaxmi Jewel Art doesn't pay any regular dividends, meaning that the company is keeping all of its profits, which makes us wonder why it is retaining its earnings if it can't use them to grow its business. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Summary

In total, we're a bit ambivalent about Shubhlaxmi Jewel Art's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 5 risks we have identified for Shubhlaxmi Jewel Art.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.