Are Strong Financial Prospects The Force That Is Driving The Momentum In Kernex Microsystems (India) Limited's NSE:KERNEX) Stock?

Kernex Microsystems (India)'s (NSE:KERNEX) stock is up by a considerable 19% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Kernex Microsystems (India)'s ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How To Calculate Return On Equity?

Return on equity 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 Kernex Microsystems (India) is:

31% = ₹536m ÷ ₹1.7b (Based on the trailing twelve months to September 2025).

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 ₹0.31 in profit.

See our latest analysis for Kernex Microsystems (India)

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.

Kernex Microsystems (India)'s Earnings Growth And 31% ROE

Firstly, we acknowledge that Kernex Microsystems (India) has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 10% which is quite remarkable. As a result, Kernex Microsystems (India)'s exceptional 36% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Kernex Microsystems (India)'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 32% in the same period.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Kernex Microsystems (India)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kernex Microsystems (India) Making Efficient Use Of Its Profits?

Given that Kernex Microsystems (India) doesn't pay any regular dividends to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, we are pretty happy with Kernex Microsystems (India)'s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 2 risks we have identified for Kernex Microsystems (India) 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.