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Is Reliance Chemotex Industries Limited’s (NSE:RELCHEMQ) Latest Stock Performance A Reflection Of Its Financial Health?


Most readers would already be aware that Reliance Chemotex Industries’ (NSE:RELCHEMQ) stock increased significantly by 16% 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. In this article, we decided to focus on Reliance Chemotex Industries’ ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Reliance Chemotex Industries

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Reliance Chemotex Industries is:

15% = ₹181m ÷ ₹1.2b (Based on the trailing twelve months to March 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 ₹0.15 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

Reliance Chemotex Industries’ Earnings Growth And 15% ROE

At first glance, Reliance Chemotex Industries seems to have a decent ROE. Especially when compared to the industry average of 11% the company’s ROE looks pretty impressive. Probably as a result of this, Reliance Chemotex Industries was able to see an impressive net income growth of 33% over the last five years. However, there could also be other causes behind this growth. Such as – high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Reliance Chemotex Industries’ growth is quite high when compared to the industry average growth of 15% in the same period, which is great to see.

NSEI:RELCHEMQ Past Earnings Growth July 22nd 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you’re wondering about Reliance Chemotex Industries”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Reliance Chemotex Industries Using Its Retained Earnings Effectively?

Reliance Chemotex Industries has a really low three-year median payout ratio of 10%, meaning that it has the remaining 90% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Additionally, Reliance Chemotex Industries has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Reliance Chemotex Industries’ performance has been quite good. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 4 risks we have identified for Reliance Chemotex Industries by visiting our risks dashboard for free on our platform here.

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.



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