Is Shubhlaxmi Jewel Art Limited's (NSE:SHUBHLAXMI) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that Shubhlaxmi Jewel Art's (NSE:SHUBHLAXMI) stock increased significantly by 15% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Shubhlaxmi Jewel Art's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Shubhlaxmi Jewel Art

How Do You 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:

5.4% = ₹12m ÷ ₹226m (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.05.

Why Is ROE Important For 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.

Shubhlaxmi Jewel Art's Earnings Growth And 5.4% ROE

It is hard to argue that Shubhlaxmi Jewel Art's ROE is much good in and of itself. Still, the company's ROE is higher than the average industry ROE of 4.2% so that's certainly interesting. But then again, seeing that Shubhlaxmi Jewel Art's five year net income shrunk at a rate of 3.3% in the past five years, makes us think again. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the decline in earnings could also be the result of this.

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 29% 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. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Shubhlaxmi Jewel Art fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shubhlaxmi Jewel Art Using Its Retained Earnings Effectively?

Because Shubhlaxmi Jewel Art doesn't pay any regular dividends, we infer that it is retaining all of its profits, which is rather perplexing when you consider the fact that there is no earnings growth to show for it. 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

Overall, we feel that Shubhlaxmi Jewel Art certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 5 risks we have identified for Shubhlaxmi Jewel Art 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.