Royal Arc Electrodes Limited's (NSE:ROYALARC) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?
Royal Arc Electrodes' (NSE:ROYALARC) stock is up by a considerable 12% over the past week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Royal Arc Electrodes' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.
How To Calculate Return On Equity?
Return on equity 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 Royal Arc Electrodes is:
13% = ₹102m ÷ ₹761m (Based on the trailing twelve months to September 2025).
The 'return' is the yearly profit. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.13 in profit.
View our latest analysis for Royal Arc Electrodes
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Royal Arc Electrodes' Earnings Growth And 13% ROE
When you first look at it, Royal Arc Electrodes' ROE doesn't look that attractive. However, its ROE is similar to the industry average of 13%, so we won't completely dismiss the company. Looking at Royal Arc Electrodes' exceptional 25% five-year net income growth in particular, we are definitely impressed. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Royal Arc Electrodes' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 33% in the same period.
Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Royal Arc Electrodes''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Royal Arc Electrodes Efficiently Re-investing Its Profits?
Royal Arc Electrodes' ' three-year median payout ratio is on the lower side at 5.2% implying that it is retaining a higher percentage (95%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.
Conclusion
Overall, we feel that Royal Arc Electrodes certainly does have some positive factors to consider. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 4 risks we have identified for Royal Arc Electrodes visit our risks dashboard for free.
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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.