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Is Weakness In K.P.R. Mill Limited (NSE:KPRMILL) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?


It is hard to get excited after looking at K.P.R. Mill’s (NSE:KPRMILL) recent performance, when its stock has declined 18% over the past month. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to K.P.R. Mill’s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

See our latest analysis for K.P.R. Mill

How To Calculate Return On Equity?

Return on equity 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 K.P.R. Mill is:

26% = ₹8.4b ÷ ₹32b (Based on the trailing twelve months to March 2022).

The ‘return’ is the yearly profit. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.26 in profit.

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.

K.P.R. Mill’s Earnings Growth And 26% ROE

To start with, K.P.R. Mill’s ROE looks acceptable. Especially when compared to the industry average of 11% the company’s ROE looks pretty impressive. This certainly adds some context to K.P.R. Mill’s exceptional 23% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared K.P.R. Mill’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 15%.

NSEI:KPRMILL Past Earnings Growth July 1st 2022

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. 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 K.P.R. Mill is trading on a high P/E or a low P/E, relative to its industry.

Is K.P.R. Mill Making Efficient Use Of Its Profits?

K.P.R. Mill’s three-year median payout ratio to shareholders is 1.6%, which is quite low. This implies that the company is retaining 98% of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Moreover, K.P.R. Mill is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to rise to 26% over the next three years. However, the company’s ROE is not expected to change by much despite the higher expected payout ratio.

Summary

Overall, we are quite pleased with K.P.R. Mill’s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company’s earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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