IFB Industries Limited (NSE: IFBIND) is doing well but fundamentals seem mixed: is there a clear direction for the stock?

IFB Industries (NSE: IFBIND) shares are up 25% in the past three months. However, we wonder if the inconsistent financial data of the company would negatively impact the current momentum of the share price. Concretely, we decided to study the ROE of IFB Industries in this article.

Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.

See our latest analysis for IFB Industries

How do you calculate return on equity?

The formula for ROE is:

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

Thus, based on the above formula, the ROE for IFB Industries is:

9.9% = ₹ 688m ÷ ₹ 7.0b (Based on the last twelve months up to June 2021).

The “return” is the annual profit. Another way to look at this is that for every 1 value of equity, the company was able to make 0.10 profit.

Why is ROE important for profit growth?

So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate compared to companies that do not. the same characteristics.

A side-by-side comparison of IFB Industries’ 9.9% profit growth and ROE

At first glance, IFB Industries’ ROE does not look so attractive. However, its ROE is similar to the industry average of 11%, so we won’t dismiss the company completely. That said, IFB Industries’ five-year net income decline rate was 8.3%. Remember that the company’s ROE is a bit low to begin with. So that’s what could cause earnings growth to contract.

So, in the next step, we compared the performance of IFB Industries to that of the industry and were disappointed to find that as the company reduced its profits, the industry increased its profits at a rate of. 5.3% over the same period.

NSEI: IFBIND Past Profit Growth October 23, 2021

Profit growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or worrisome. Is IFB Industries just valued compared to other companies? These 3 evaluation measures could help you decide.

Is IFB Industries using its profits efficiently?

IFB Industries does not pay any dividends, which means that potentially all of its profits are reinvested in the business, which does not explain why the company’s profits have declined if it keeps all of its profits. So there could be other factors at play here that could potentially hamper growth. For example, the company faced headwinds.

Conclusion

All in all, we are a little ambivalent about the performance of IFB Industries. Although the company has a high rate of profit retention, its low rate of return is likely to hamper its profit growth. In conclusion, we would proceed with caution with this business and one way to do that would be to look at the risk profile of the business. To find out about the 3 risks that we have identified for IFB Industries, visit our risk dashboard free of charge.

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

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