Are Urja Global Limited's (NSE:URJA) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

With its stock down 6.3% over the past month, it is easy to disregard Urja Global (NSE:URJA). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Urja Global's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Urja Global

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 Urja Global is:

0.8% = ₹13m ÷ ₹1.6b (Based on the trailing twelve months to June 2020).

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 ₹0.01.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Urja Global's Earnings Growth And 0.8% ROE

It is hard to argue that Urja Global's ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 0.8% either. As a result, Urja Global's decent 13% net income growth seen over the past five years bodes well with us. We reckon that there could also be other factors at play that are influencing the company's growth. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between Urja Global's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 13% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Urja Global fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Urja Global Making Efficient Use Of Its Profits?

Conclusion

Overall, we feel that Urja Global 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. Our risks dashboard will have the 1 risk we have identified for Urja Global.

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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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