Kanani Industries (NSE:KANANIIND) has had a strong run in the stock market with a significant 12% increase in its shares over the past week. However, we wonder if the company’s inconsistent financial statements would negatively impact the current share price dynamics. Specifically, we decided to study the ROE of Kanani Industries in this article.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Our analysis indicates that KANANIIND is potentially overvalued!
How is ROE calculated?
The ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Kanani Industries is:
4.6% = ₹27 million ÷ ₹588 million (based on the last twelve months to June 2022).
“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every ₹1 of share capital it has, the company has made a profit of ₹0.05.
What does ROE have to do with earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Earnings growth and ROE of 4.6% from Kanani Industries
It is difficult to say that the ROE of Kanani Industries is very good on its own. Even compared to the industry average of 12%, the ROE figure is quite disappointing. Thus, the weak 3.2% net income growth observed by Kanani Industries over the past five years could likely be the result of lower ROE.
Then, when comparing with industry net income growth, we found that Kanani Industries’ reported growth was lower than industry growth by 17% over the same period, which we don’t like. no see.
Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the action is placed for a bright or bleak future. If you’re wondering about Kanani Industries’ valuation, check out this indicator of its price/earnings ratio, relative to its industry.
Does Kanani Industries effectively reinvest its profits?
Kanani Industries pays no dividends, which means that potentially all of its profits are reinvested in the business. However, there has been very little earnings growth for this. Therefore, there could be other reasons for the lack in this regard. For example, the business might be in decline.
Overall, we have mixed feelings about Kanani Industries. Although the company has a high earnings retention rate, its low rate of return is likely hampering its earnings growth. In conclusion, we would proceed with caution with this business and one way to do that would be to review the risk profile of the business. You can see the 1 risk we have identified for Kanani Industries by visiting our risk dashboard for free on our platform here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.