Are Robust Financials Driving The Recent Rally In Srivari Spices and Foods Limited's (NSE:SSFL) Stock?

Simply Wall St · 08/31 02:00

Most readers would already be aware that Srivari Spices and Foods' (NSE:SSFL) stock increased significantly by 23% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Srivari Spices and Foods' ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Srivari Spices and Foods

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Srivari Spices and Foods is:

29% = ₹70m ÷ ₹240m (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.29 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Srivari Spices and Foods' Earnings Growth And 29% ROE

Firstly, we acknowledge that Srivari Spices and Foods has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 11% which is quite remarkable. Under the circumstances, Srivari Spices and Foods' considerable five year net income growth of 54% was to be expected.

Next, on comparing with the industry net income growth, we found that Srivari Spices and Foods' growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.

past-earnings-growth
NSEI:SSFL Past Earnings Growth August 31st 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Srivari Spices and Foods is trading on a high P/E or a low P/E, relative to its industry.

Is Srivari Spices and Foods Making Efficient Use Of Its Profits?

Srivari Spices and Foods doesn't pay any regular dividends to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Conclusion

Overall, we are quite pleased with Srivari Spices and Foods' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 3 risks we have identified for Srivari Spices and Foods visit our risks dashboard for free.