With its stock down 7.1% over the past month, it is easy to disregard Krishna Institute of Medical Sciences (NSE:KIMS). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Krishna Institute of Medical Sciences’ 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.
See our latest analysis for Krishna Institute of Medical Sciences
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Krishna Institute of Medical Sciences is:
17% = ₹3.6b ÷ ₹21b (Based on the trailing twelve months to December 2023).
The ‘return’ is the amount earned after tax over the last twelve months. That means that for every ₹1 worth of shareholders’ equity, the company generated ₹0.17 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. 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 Krishna Institute of Medical Sciences’ Earnings Growth And 17% ROE
To start with, Krishna Institute of Medical Sciences’ ROE looks acceptable. Further, the company’s ROE compares quite favorably to the industry average of 12%. This certainly adds some context to Krishna Institute of Medical Sciences’ exceptional 28% net income growth seen over the past five years. However, there could also be other causes behind this 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.
We then performed a comparison between Krishna Institute of Medical Sciences’ net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 30% in the same 5-year period.
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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Krishna Institute of Medical Sciences is trading on a high P/E or a low P/E, relative to its industry.
Is Krishna Institute of Medical Sciences Making Efficient Use Of Its Profits?
Given that Krishna Institute of Medical Sciences doesn’t pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Summary
On the whole, we feel that Krishna Institute of Medical Sciences’ performance has been quite good. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company’s earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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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.
