It’s hard to get excited after looking at Ajooni Biotech’s (NSE: AJOONI) recent performance as its stock has fallen 8.7% over the last week. However, stock prices are usually driven by a company’s finances in the long run, which in this case looks quite respectable. Specifically, we decided to study Ajooni Biotechs ROE in this article.
Return on equity or ROE is an important factor to consider by a shareholder because it tells them how effectively their capital is being reinvested. In short, it is used to assess the profitability of a company in relation to its equity.
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net profit (from continuing operations) ÷ Equity
So based on the above formula, ROE for Ajooni Biotech is:
4.0% = 6.5 million ÷ 163 mio. (Based on the subsequent twelve months to September 2020).
The ‘return’ is the profit for the last twelve months. One way to conceptualize this is that for every ₹ 1 of the shareholder’s capital it has, the company earned ₹ 0.04 in profit.
What is the relationship between ROE and earnings growth?
We have already established that ROE acts as an effective profit-generating gauge for a company’s future earnings. We must now evaluate how much profit the company reinvests or “preserves” for future growth, which then gives us an idea of the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and profits, the higher the growth of a company compared to companies that do not necessarily have these characteristics.
Ajooni Biotech’s earnings growth and 4.0% ROE
It is hard to argue that Ajooni Biotech’s ROE is very good in itself. Even compared to the industry average of 11%, the ROE figure is quite disappointing. Despite this, Ajooni Biotech has surprisingly seen a unique 21% net income growth over the last five years. We anticipate that there may be other factors at play here. Such as – high earnings retention or effective management in place.
Next, when we compared Ajooni Biotech’s net income growth with the industry, we found that the company’s reported growth corresponds to the industry’s average growth rate of 18% over the same period.
Earnings growth is a huge factor in the valuation of stocks. The investor must try to determine whether the expected growth or decline in earnings, as the case may be, is priced. This then helps them decide if the stock will be placed in a bright or gloomy future. Is Ajooni Biotech reasonably rated in relation to other companies? These 3 valuation measures can help you decide.
Is Ajooni Biotech effectively investing its profits?
All in all, we feel that Ajooni Biotech has some positive features. With a high reinvestment, albeit at a low return on investment, the company has managed to see significant growth in its earnings. Even if we do not completely lay off the company, what we would do is try to determine how risky the company is to make a more informed decision about the company. To know the 2 risks we have identified for Ajooni Biotech, visit our risk dashboard for free.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any shares and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by basic data. Please note that our analysis may not include the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in the mentioned stocks.
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