Is Rolex Rings Limited's (NSE:ROLEXRINGS) Latest Stock Performance A Reflection Of Its Financial Health?

view original post

Rolex Rings’ (NSE:ROLEXRINGS) stock is up by a considerable 20% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Rolex Rings’ ROE.

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.

View our latest analysis for Rolex Rings

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 Rolex Rings is:

26% = ₹1.2b ÷ ₹4.8b (Based on the trailing twelve months to September 2021).

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 ₹0.26 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Rolex Rings’ Earnings Growth And 26% ROE

To start with, Rolex Rings’ ROE looks acceptable. On comparing with the average industry ROE of 12% the company’s ROE looks pretty remarkable. This certainly adds some context to Rolex Rings’ decent 18% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Rolex Rings’ growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

NSEI:ROLEXRINGS Past Earnings Growth January 10th 2022

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. 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 Rolex Rings is trading on a high P/E or a low P/E, relative to its industry.

Is Rolex Rings Efficiently Re-investing Its Profits?

Given that Rolex Rings doesn’t pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Summary

Overall, we are quite pleased with Rolex Rings’ 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. 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. Let’s not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 2 risks we have identified for Rolex Rings 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.