It is hard to get excited after looking at Lead Reclaim and Rubber Products’ (NSE:LRRPL) recent performance, when its stock has declined 12% over the past week. However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Lead Reclaim and Rubber Products’ ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Lead Reclaim and Rubber Products
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Lead Reclaim and Rubber Products is:
3.3% = ₹3.7m ÷ ₹112m (Based on the trailing twelve months to March 2024).
The ‘return’ is the yearly profit. That means that for every ₹1 worth of shareholders’ equity, the company generated ₹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. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Lead Reclaim and Rubber Products’ Earnings Growth And 3.3% ROE
As you can see, Lead Reclaim and Rubber Products’ ROE looks pretty weak. Even compared to the average industry ROE of 10%, the company’s ROE is quite dismal. Although, we can see that Lead Reclaim and Rubber Products saw a modest net income growth of 12% over the past five years. We reckon that there could be other factors at play here. Such as – high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Lead Reclaim and Rubber Products’ reported growth was lower than the industry growth of 16% over the last few years, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Lead Reclaim and Rubber Products fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Lead Reclaim and Rubber Products Using Its Retained Earnings Effectively?
Lead Reclaim and Rubber Products doesn’t pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the decent earnings growth number that we discussed above.
Conclusion
In total, it does look like Lead Reclaim and Rubber Products has some positive aspects to its business. That is, a decent growth in earnings backed by a high rate of reinvestment. However, we do feel that that earnings growth could have been higher if the business were to improve on the low ROE rate. Especially given how the company is reinvesting a huge chunk of its profits. 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 4 risks we have identified for Lead Reclaim and Rubber Products visit our risks dashboard for free.
Valuation is complex, but we’re helping make it simple.
Find out whether Lead Reclaim and Rubber Products is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Valuation is complex, but we’re helping make it simple.
Find out whether Lead Reclaim and Rubber Products is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
