Has Wonder Electricals Limited's (NSE:WEL) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Wonder Electricals' (NSE:WEL) stock is up by a considerable 26% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Wonder Electricals' ROE.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Wonder Electricals

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 Wonder Electricals is:

13% = ₹112m ÷ ₹879m (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.13 in profit.

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 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.

Wonder Electricals' Earnings Growth And 13% ROE

When you first look at it, Wonder Electricals' ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 11%, we may spare it some thought. Moreover, we are quite pleased to see that Wonder Electricals' net income grew significantly at a rate of 28% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing Wonder Electricals' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 28% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Wonder Electricals fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Wonder Electricals Using Its Retained Earnings Effectively?

Wonder Electricals' three-year median payout ratio is a pretty moderate 26%, meaning the company retains 74% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Wonder Electricals is reinvesting its earnings efficiently.

Along with seeing a growth in earnings, Wonder Electricals only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

Overall, we feel that Wonder Electricals 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. To know the 2 risks we have identified for Wonder Electricals visit our risks dashboard for free.

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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.