Sportking India’s (NSE:SPORTKING) stock is up by a considerable 22% over the past month. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Sportking India’s ROE in this article.
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 simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
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How To Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Sportking India is:
40% = ₹3.0b ÷ ₹7.7b (Based on the trailing twelve months to September 2022).
The ‘return’ refers to a company’s earnings over the last year. One way to conceptualize this is that for each ₹1 of shareholders’ capital it has, the company made ₹0.40 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. 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. 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.
Sportking India’s Earnings Growth And 40% ROE
To begin with, Sportking India has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 11% the company’s ROE is quite impressive. As a result, Sportking India’s exceptional 70% net income growth seen over the past five years, doesn’t come as a surprise.
As a next step, we compared Sportking India’s 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 19%.
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. This then helps them determine if the stock is placed for a bright or bleak future. Is Sportking India fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Sportking India Efficiently Re-investing Its Profits?
Given that Sportking India doesn’t pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Overall, we are quite pleased with Sportking India’s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let’s not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 2 risks we have identified for Sportking India visit our risks dashboard for free.
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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.