Is the share price of Kitex Garments Limited (NSE:KITEX) struggling due to its mixed financials?
Kitex Garments (NSE:KITEX) had a difficult month with a 15% drop in its share price. However, we decided to study the company’s financial statements to determine if they had anything to do with the price drop. Fundamentals usually dictate market outcomes, so it makes sense to study company finances. In particular, we will be paying close attention to the ROE of Kitex Garments today.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simple terms, it is used to assess the profitability of a company in relation to its equity.
Check out our latest review for Kitex Garments
How is ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Kitex Garments is:
12% = ₹892m ÷ ₹7.3b (Based on trailing twelve months to December 2021).
“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 ₹0.12.
Why is ROE important for earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
A side-by-side comparison of Kitex Garments earnings growth and 12% ROE
At first glance, the ROE of Kitex Garments does not look very promising. Yet further investigation shows that the company’s ROE is similar to the industry average of 12%. Yet Kitex Garments has seen steady growth in net income over the past five years. Remember that the company’s ROE is not particularly good to start with. So this could also be one of the reasons for the company’s stable earnings growth.
We then compared Kitex Garments’ net income growth with the industry and found that the industry average growth rate was 12% over the same period.
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. Is Kitex Garments fairly priced compared to other companies? These 3 assessment metrics might help you decide.
Does Kitex Garments use its profits effectively?
Kitex Garments’ low three-year median payout ratio of 9.6% (meaning the company retains 90% of earnings) should mean that the company retains most of its earnings and, therefore, should experience a higher than expected growth.
Additionally, Kitex Garments has paid dividends over a period of at least ten years, which means the company’s management is committed to paying dividends even if it means little or no earnings growth.
Overall, we believe Kitex Garments’ performance is open to many interpretations. Although the company has a high earnings retention rate, its low rate of return is likely hampering its earnings growth. So far, we have only made a short study of the company’s growth data. You can do your own research on Kitex Garments and see how it has performed in the past by watching this FREE detailed graph past profits, revenue and cash flow.
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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.