Is Banaras Beads Limited’s (NSE:BANARBEADS) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that Banaras Beads’ (NSE:BANARBEADS) stock increased significantly by 18% over the past month. We wonder if and what role the company’s financials play in that price change as a company’s long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Banaras Beads’ ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

View our latest analysis for Banaras Beads

How To 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 Banaras Beads is:

6.3% = ₹33m ÷ ₹516m (Based on the trailing twelve months to June 2022).

The ‘return’ is the profit over the last twelve months. That means that for every ₹1 worth of shareholders’ equity, the company generated ₹0.06 in profit.

What Has ROE Got To Do With 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. 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 Banaras Beads’ Earnings Growth And 6.3% ROE

As you can see, Banaras Beads’ ROE looks pretty weak. Even compared to the average industry ROE of 12%, the company’s ROE is quite dismal. Although, we can see that Banaras Beads saw a modest net income growth of 18% 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 Banaras Beads’ net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 16% in the same period.

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. 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 Banaras Beads is trading on a high P/E or a low P/E, relative to its industry.

Is Banaras Beads Making Efficient Use Of Its Profits?

Banaras Beads has a healthy combination of a moderate three-year median payout ratio of 48% (or a retention ratio of 52%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Besides, Banaras Beads has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, it does look like Banaras Beads has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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 3 risks we have identified for Banaras Beads 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.