Are Infibeam Avenues Limited's (NSE:INFIBEAM) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

By
Simply Wall St
Published
July 23, 2021
NSEI:INFIBEAM
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Infibeam Avenues (NSE:INFIBEAM) has had a rough month with its share price down 17%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Infibeam Avenues' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Infibeam Avenues

How To 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 Infibeam Avenues is:

2.4% = ₹702m ÷ ₹29b (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 ₹0.02 in profit.

Why Is ROE Important For 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. 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.

A Side By Side comparison of Infibeam Avenues' Earnings Growth And 2.4% ROE

It is quite clear that Infibeam Avenues' ROE is rather low. Even when compared to the industry average of 11%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Infibeam Avenues grew its net income at a significant rate of 24% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Infibeam Avenues' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 11%.

past-earnings-growth
NSEI:INFIBEAM Past Earnings Growth July 24th 2021

Earnings growth is a huge factor in stock valuation. 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 Infibeam Avenues''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Infibeam Avenues Making Efficient Use Of Its Profits?

Infibeam Avenues' ' three-year median payout ratio is on the lower side at 9.7% implying that it is retaining a higher percentage (90%) of its profits. So it looks like Infibeam Avenues is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Infibeam Avenues has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we do feel that Infibeam Avenues has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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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