Market Shows Low Tolerance For Ruby Mills’ Mixed Fundamentals

With its stock down 19% over the past three months, it is easy to disregard Ruby Mills (NSE:RUBYMILLS). We, however decided to study the company’s financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it’s worth paying close attention. Specifically, we decided to study Ruby Mills’ ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Put another way, it reveals the company’s success at turning shareholder investments into profits.

See our latest analysis for Ruby Mills

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 Ruby Mills is:

8.1% = ₹437m ÷ ₹5.4b (Based on the trailing twelve months to September 2022).

The ‘return’ refers to a company’s earnings over the last year. So, this means that for every ₹1 of its shareholder’s investments, the company generates a profit of ₹0.08.

Why Is ROE Important For Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

A Side By Side comparison of Ruby Mills’ Earnings Growth And 8.1% ROE

It is hard to argue that Ruby Mills’ ROE is much good in and of itself. Even compared to the average industry ROE of 11%, the company’s ROE is quite dismal. Therefore, Ruby Mills’ flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Ruby Mills’ net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 19% in the same period, which is a bit concerning.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Ruby Mills”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Ruby Mills Efficiently Re-investing Its Profits?

Ruby Mills has a low three-year median payout ratio of 4.9% (or a retention ratio of 95%) but the negligible earnings growth number doesn’t reflect this as high growth usually follows high profit retention.

Additionally, Ruby Mills has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth.

Summary

On the whole, we feel that the performance shown by Ruby Mills can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. So far, we’ve only made a quick discussion around the company’s earnings growth. You can do your own research on Ruby Mills and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.