Can Mixed Fundamentals Have A Negative Impact on Sirca Paints India Limited (NSE:SIRCA) Current Share Price Momentum?

Most readers would already be aware that Sirca Paints India's (NSE:SIRCA) stock increased significantly by 34% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Sirca Paints India's ROE.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Sirca Paints India

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 Sirca Paints India is:

2.1% = ₹37m ÷ ₹1.8b (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.02 in profit.

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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Sirca Paints India's Earnings Growth And 2.1% ROE

It is quite clear that Sirca Paints India's ROE is rather low. Not just that, even compared to the industry average of 3.0%, the company's ROE is entirely unremarkable. Therefore, the disappointing ROE therefore provides a background to Sirca Paints India's very little net income growth of 3.8% over the past five years.

We then compared Sirca Paints India's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 21% in the same period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Sirca Paints India fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sirca Paints India Efficiently Re-investing Its Profits?

Conclusion

Overall, we have mixed feelings about Sirca Paints India. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. 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 4 risks we have identified for Sirca Paints India.

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This article by Simply Wall St is general in nature. 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.
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