Tribhovandas Bhimji Zaveri Limited's (NSE:TBZ) Stock Is Going Strong: Have Financials A Role To Play?

Most readers would already be aware that Tribhovandas Bhimji Zaveri's (NSE:TBZ) stock increased significantly by 80% over the past three months. 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. Specifically, we decided to study Tribhovandas Bhimji Zaveri'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Tribhovandas Bhimji Zaveri

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Tribhovandas Bhimji Zaveri is:

2.4% = ₹113m ÷ ₹4.7b (Based on the trailing twelve months to September 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?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

Tribhovandas Bhimji Zaveri's Earnings Growth And 2.4% ROE

It is hard to argue that Tribhovandas Bhimji Zaveri's ROE is much good in and of itself. Even when compared to the industry average of 8.3%, the ROE figure is pretty disappointing. Despite this, surprisingly, Tribhovandas Bhimji Zaveri saw an exceptional 32% net income growth over the past five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Tribhovandas Bhimji Zaveri's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 27% in the same period.

Earnings growth is a huge factor in stock valuation. 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. Is Tribhovandas Bhimji Zaveri fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tribhovandas Bhimji Zaveri Using Its Retained Earnings Effectively?

The three-year median payout ratio for Tribhovandas Bhimji Zaveri is 27%, which is moderately low. The company is retaining the remaining 73%. 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 eight years of paying a dividend.

Summary

Overall, we feel that Tribhovandas Bhimji Zaveri certainly does have some positive factors to consider. 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. You can see the 4 risks we have identified for Tribhovandas Bhimji Zaveri by visiting our risks dashboard for free on our platform here.

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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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