KKV Agro Powers Limited's (NSE:KKVAPOW) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

KKV Agro Powers (NSE:KKVAPOW) has had a rough week with its share price down 6.6%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study KKV Agro Powers' 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for KKV Agro Powers

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 KKV Agro Powers is:

2.7% = ₹5.3m ÷ ₹193m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.03 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

KKV Agro Powers' Earnings Growth And 2.7% ROE

It is quite clear that KKV Agro Powers' ROE is rather low. Even when compared to the industry average of 6.0%, the ROE figure is pretty disappointing. KKV Agro Powers was still able to see a decent net income growth of 15% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. Such as - high earnings retention or an efficient management in place.

As a next step, we compared KKV Agro Powers' 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 0.8%.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is KKVAPOW worth today? The intrinsic value infographic in our free research report helps visualize whether KKVAPOW is currently mispriced by the market.

Is KKV Agro Powers Using Its Retained Earnings Effectively?

In KKV Agro Powers' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 7.8% (or a retention ratio of 92%), which suggests that the company is investing most of its profits to grow its business.

Additionally, KKV Agro Powers has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we feel that KKV Agro Powers certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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 would have the 3 risks we have identified for KKV Agro Powers.

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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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