Is the recent performance of Pudumjee Paper Products Limited (NSE:PDMJEPAPER) shares influenced by its fundamentals in any way?

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Pudumjee Paper Products (NSE: PDMJEPAPER) stock is up 19% over the past month. Since stock prices are usually aligned with a company’s financial performance over the long term, we decided to take a closer look at its financial indicators to see if they had a role to play in the recent price movement. . In particular, we will pay attention to the ROE of Pudumjee Paper Products today.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simple terms, it is used to assess the profitability of a company in relation to its equity.

Our analysis indicates that PDMJEPAPER is potentially undervalued!

How is ROE calculated?

ROE can be calculated using the formula:

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

So, based on the above formula, the ROE for Pudumjee Paper Products is:

11% = ₹384m ÷ ₹3.4b (Based on trailing twelve months to June 2022).

The “yield” is the profit of the last twelve months. One way to conceptualize this is that for every ₹1 of share capital it has, the company has made a profit of ₹0.11.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently 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 earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.

A side-by-side comparison of Pudumjee Paper Products’ earnings growth and 11% ROE

At first glance, the ROE of Pudumjee Paper Products does not have much to say. Yet further investigation shows that the company’s ROE is similar to the industry average of 11%. That said, Pudumjee Paper Products has posted modest net income growth of 19% over the past five years. Given the moderately low ROE, it is quite possible that other aspects positively influence the company’s earnings growth. Such as – high revenue retention or effective management in place.

Then, comparing with the industry net income growth, we found that the growth of Pudumjee Paper Products is quite high compared to the industry average growth of 8.5% during the same period, which is great to see.

NSEI:PDMJEPAPER Past Earnings Growth October 29, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. If you’re wondering about Pudumjee Paper Products’ valuation, check out this indicator of its price/earnings ratio, relative to its industry.

Does Pudumjee Paper Products Use Retained Earnings Effectively?

Pudumjee Paper Products has a low three-year median payout ratio of 7.0%, which means the company keeps the remaining 93% of its profits. This suggests that the management reinvests most of the profits to grow the business.

Additionally, Pudumjee Paper Products is committed to continuing to share its profits with shareholders, which we infer from its six-year long history of paying dividends.

Summary

Overall, we think Pudumjee Paper Products definitely has some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in its profits. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. You can see the 3 risks we have identified for Pudumjee paper products by visiting our risk dashboard for free on our platform here.

Valuation is complex, but we help make it simple.

Find out if Pudumjee Paper Products is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis

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

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