Has Tribhovandas Bhimji Zaveri Limited's (NSE:TBZ) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

By
Simply Wall St
Published
May 31, 2021
NSEI:TBZ
Source: Shutterstock

Tribhovandas Bhimji Zaveri (NSE:TBZ) has had a great run on the share market with its stock up by a significant 19% over the last month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Tribhovandas Bhimji Zaveri'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Tribhovandas Bhimji Zaveri

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 Tribhovandas Bhimji Zaveri is:

8.3% = ₹433m ÷ ₹5.2b (Based on the trailing twelve months to March 2021).

The 'return' is the yearly profit. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.08 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.

A Side By Side comparison of Tribhovandas Bhimji Zaveri's Earnings Growth And 8.3% ROE

It is hard to argue that Tribhovandas Bhimji Zaveri's ROE is much good in and of itself. Further, we noted that the company's ROE is similar to the industry average of 8.3%. Moreover, we are quite pleased to see that Tribhovandas Bhimji Zaveri's net income grew significantly at a rate of 38% over the last five years. Considering the low ROE, it is quite possible that there might also be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then compared Tribhovandas Bhimji Zaveri's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 16% in the same period.

past-earnings-growth
NSEI:TBZ Past Earnings Growth June 1st 2021

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Tribhovandas Bhimji Zaveri's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Tribhovandas Bhimji Zaveri Making Efficient Use Of Its Profits?

The three-year median payout ratio for Tribhovandas Bhimji Zaveri is 35%, which is moderately low. The company is retaining the remaining 65%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Tribhovandas Bhimji Zaveri is reinvesting its earnings efficiently.

Moreover, Tribhovandas Bhimji Zaveri is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.

Summary

In total, it does look like Tribhovandas Bhimji Zaveri has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. 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. Our risks dashboard would have the 3 risks we have identified for Tribhovandas Bhimji Zaveri.

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