Century Textiles and Industries Limited (NSE: CENTURYTEX) is doing well but fundamentals look mixed: is there a clear direction for action?
Century Textiles and Industries (NSE: CENTURYTEX) shares rose 13% in the past month. But the company’s key financial metrics appear to differ across the board, leading us to question whether the current momentum in the company’s stock price can be sustained. In particular, we will be paying close attention to the ROE of Century Textiles and Industries today.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. 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 review for Century Textiles and Industries
How is the ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Century Textiles and Industries is:
2.4% = ₹ 892m ÷ ₹ 38b (Based on the last twelve months up to September 2021).
The “return” is the annual profit. This means that for every 1 of equity, the company generated 0.02 of profit.
Why is ROE important for profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Century Textiles and Industries profit growth and 2.4% ROE
It is difficult to say that Century Textiles and Industries’ RCP is very good on its own. Even compared to the industry average ROE of 9.5%, the company’s ROE is pretty dismal. For this reason, Century Textiles and Industries’ five-year net profit decline of 4.4% is not surprising given its lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. For example, the company has a very high payout rate or faces competitive pressures.
That being said, we compared the performance of Century Textiles and Industries with that of the industry and we were concerned that although the company reduced its profits, the industry increased its profits at a rate of. 1.2% over the same period.
Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine whether the future of the stock looks bright or threatening. A 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 outlook. So, you might want to check whether Century Textiles and Industries is trading high P / E or low P / E, relative to its industry.
Is Century Textiles and Industries Efficiently Using Its Retained Profits?
When we put together Century Textiles and Industries’ low three-year median distribution rate of 17% (where it retains 83% of its profits), calculated for the last three-year period, we are puzzled by the lack of growth. This should generally not be the case when a business keeps most of its profits. It seems that there could be other reasons for the lack in this regard. For example, the business could be in decline.
Additionally, Century Textiles and Industries has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth.
All in all, we are a little ambivalent about the performance of Century Textiles and 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 company and one way to do it would be to look at the risk profile of the company. To know the 1 risk that we have identified for Century Textiles and Industries, visit our free risk dashboard.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
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 any stock 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.