Radico Khaitan (NSE: RADICO) shares have risen 25% in the past three months. Given that the market rewards strong, long-term financials, we wonder if this is the case in this case. In particular, we will pay special attention to Radico Khaitan’s ROE today.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
Check out our latest analysis for Radico Khaitan
How do you calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, Radico Khaitan’s ROE is:
16% = â¹ 2.9b Ã· â¹ 18b (based on the last twelve months up to June 2021).
“Return” refers to a company’s profits over the past year. This means that for every 1 of equity, the company generated 0.16 of profit.
Why is ROE important for profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “holding back” for future growth, which then gives us an idea of ââthe growth potential of the company. Assuming everything is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics. .
A side-by-side comparison of Radico Khaitan’s profit growth and 16% ROE
For starters, Radico Khaitan appears to have a respectable ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 12%. This likely laid the foundation for Radico Khaitan’s significant 23% net income growth over the past five years. We believe that there could also be other aspects that positively influence the company’s profit growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
We then compared Radico Khaitan’s net income growth with the industry and we are delighted to see that the company’s growth figure is higher compared to the industry which has a growth rate of 6.4. % during the same period.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. Is Radico Khaitan fair valued over other companies? These 3 evaluation measures could help you decide.
Is Radico Khaitan effectively reinvesting his profits?
Radico Khaitan’s three-year median payout ratio to shareholders is 12%, which is quite low. This implies that the company keeps 88% of its profits. So it looks like Radico Khaitan is massively reinvesting his profits to grow his business, which is reflected in his profit growth.
In addition, Radico Khaitan is determined to continue to share his profits with his shareholders, which we can deduce from his long history of paying dividends for at least ten years.
Overall, we think Radico Khaitan’s performance has been quite good. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. If the company continues to grow earnings like it has, it could have a positive impact on its stock price given the influence of earnings per share on long-term stock prices. Remember that the price of a stock also depends on the perceived risk. Therefore, investors should keep themselves informed of the risks involved before investing in a business. Our risk dashboard will contain risk 1 that we have identified for Radico Khaitan.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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