Does The Market Have A Low Tolerance For Aditya Birla Fashion and Retail Limited’s (NSE:ABFRL) Mixed Fundamentals?

With its stock down 16% over the past three months, it is easy to disregard Aditya Birla Fashion and Retail (NSE:ABFRL). It is possible that the markets have ignored the company’s differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it’s worth paying close attention. In this article, we decided to focus on Aditya Birla Fashion and Retail’s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.

Check out our latest analysis for Aditya Birla Fashion and Retail

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Aditya Birla Fashion and Retail is:

9.8% = ₹3.5b ÷ ₹36b (Based on the trailing twelve months to September 2022).

The ‘return’ is the profit over the last twelve months. That means that for every ₹1 worth of shareholders’ equity, the company generated ₹0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of Aditya Birla Fashion and Retail’s Earnings Growth And 9.8% ROE

At first glance, Aditya Birla Fashion and Retail’s ROE doesn’t look very promising. However, given that the company’s ROE is similar to the average industry ROE of 12%, we may spare it some thought. But Aditya Birla Fashion and Retail saw a five year net income decline of 25% over the past five years. Bear in mind, the company does have a slightly low ROE. So that’s what might be causing earnings growth to shrink.

However, when we compared Aditya Birla Fashion and Retail’s growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 19% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Aditya Birla Fashion and Retail fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Aditya Birla Fashion and Retail Using Its Retained Earnings Effectively?

Aditya Birla Fashion and Retail doesn’t pay any dividend, meaning that potentially all of its profits are being reinvested in the business, which doesn’t explain why the company’s earnings have shrunk if it is retaining all of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Conclusion

Overall, we have mixed feelings about Aditya Birla Fashion and Retail. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.