Stock Futures – Is Avenue Supermarts Limited’s (NSE:DMART) Latest Stock Performance A Reflection Of Its Financial Health?
Most readers would already be aware that Avenue Supermarts’ (NSE:DMART) stock increased significantly by 11% over the past three months. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Avenue Supermarts’ ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
View our latest analysis for Avenue Supermarts
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Avenue Supermarts is:
9.0% = ₹11b ÷ ₹122b (Based on the trailing twelve months to March 2021).
The ‘return’ refers to a company’s earnings over the last year. That means that for every ₹1 worth of shareholders’ equity, the company generated ₹0.09 in profit.
Why Is ROE Important For Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. 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.
Avenue Supermarts’ Earnings Growth And 9.0% ROE
On the face of it, Avenue Supermarts’ ROE is not much to talk about. Although a closer study shows that the company’s ROE is higher than the industry average of 5.9% which we definitely can’t overlook. Consequently, this likely laid the ground for the decent growth of 17% seen over the past five years by Avenue Supermarts. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.
As a next step, we compared Avenue Supermarts’ 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 5.9%.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. Is Avenue Supermarts fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Avenue Supermarts Using Its Retained Earnings Effectively?
Overall, we are quite pleased with Avenue Supermarts’ performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
When trading Avenue Supermarts or any other investment, use the platform considered by many to be the Professional’s Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.