Is the weakness in shares of Radico Khaitan Limited (NSE:RADICO) a sign that the market could be wrong given its strong financial outlook?

It’s hard to get excited after watching the recent performance of Radico Khaitan (NSE:RADICO), as its stock has fallen 4.8% over the past month. But if you pay close attention, you might realize that its strong financials could mean the stock could potentially see a long-term rise in value, as the markets generally reward companies in good financial shape. In particular, we will pay attention to the ROE of Radico Khaitan today.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

Check out our latest analysis for Radico Khaitan

How do you calculate return on equity?

the ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE of Radico Khaitan is:

15% = ₹2.9 billion ÷ ₹19 billion (based on the last twelve months to September 2021).

The “yield” is the amount earned after tax over the last twelve months. This therefore means that for every ₹1 of its shareholder’s investment, the company generates a profit of ₹0.15.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Radico Khaitan Earnings Growth and 15% ROE

For starters, Radico Khaitan’s ROE looks acceptable. And comparing with the industry, we found that the industry average ROE is similar at 15%. This likely partly explains Radico Khaitan’s significant 22% net income growth over the past five years, among other factors. However, there could also be other drivers behind this growth. For example, the business has a low payout ratio or is efficiently managed.

Then, comparing with the industry net income growth, we found that Radico Khaitan’s growth is quite high compared to the industry average growth of 9.4% over the same period, which which is great to see.

NSEI: RADICO Past Earnings Growth January 27, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the stock is set for a bright or bleak future. A 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 outlook. So, you might want to check if Radico Khaitan is trading on a high P/E or a low P/E, relative to its industry.

Does Radico Khaitan effectively reinvest its profits?

Radico Khaitan’s three-year median payout ratio is below 11%, meaning it retains a higher percentage (89%) of its earnings. So it looks like management is massively reinvesting earnings to grow their business, which is reflected in their earnings growth.

Moreover, Radico Khaitan has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we’re pretty happy with Radico Khaitan’s performance. In particular, it is good to see that the company is investing heavily in its business, and together with a high rate of return, this has led to significant growth in its profits. If the company continues to increase its earnings as it has, it could have a positive impact on its share price given how earnings per share influence prices over the long term. Not to mention that stock price results also depend on the potential risks a company may face. It is therefore important for investors to be aware of the risks associated with the business. You can see the 1 risk we have identified for Radico Khaitan by consulting our risk dashboard for free on our platform here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Meredith Campagna

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