Is Campus Activewear Limited’s (NSE:CAMPUS) Stock’s Recent Performance Being Led By Its Attractive Financial Prospects?

Campus Activewear (NSE:CAMPUS) has had a great run on the share market with its stock up by a significant 20% over the last three months. 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 Campus Activewear’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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

Our analysis indicates that CAMPUS is potentially overvalued!

How Is ROE Calculated?

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 Campus Activewear is:

34% = ₹1.5b ÷ ₹4.4b (Based on the trailing twelve months to June 2022).

The ‘return’ is the income the business earned over the last year. So, this means that for every ₹1 of its shareholder’s investments, the company generates a profit of ₹0.34.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Campus Activewear’s Earnings Growth And 34% ROE

First thing first, we like that Campus Activewear has an impressive ROE. Secondly, even when compared to the industry average of 12% the company’s ROE is quite impressive. As a result, Campus Activewear’s exceptional 36% net income growth seen over the past five years, doesn’t come as a surprise.

We then compared Campus Activewear’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 18% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. Is Campus Activewear fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Campus Activewear Efficiently Re-investing Its Profits?

Campus Activewear doesn’t pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

Overall, we are quite pleased with Campus Activewear’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. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.