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Byke Hospitality (NSE:BYKE) shares are down 11% in the past week, so it’s easy to ignore. However, we decided to look into the company’s financials to determine if they were related to the price drop. Fundamentals often determine market outcomes, so it makes sense to study a company’s financial health. In this article, we decided to focus on Byke Hospitality’s ROE.
Return on equity, or ROE, is a test of a company’s growth in value and how effectively it manages investors’ money. In other words, it is a profitability ratio that measures the return on capital provided by a company’s shareholders.
Check out our latest analysis for Byke Hospitality
How to calculate return on equity?
ROE can be calculated using the following formula:
Return on equity = Net profit (from continuing operations) ÷ Shareholders’ equity
Therefore, based on the above formula, Byke Hospitality’s ROE is:
3.4% = Rs 55m ÷ Rs 1.6b (based on trailing 12 months to December 2023).
“Return” refers to the company’s earnings last year. One way to conceptualize this is that for every ₹1 of shareholders’ capital it has, the company earned ₹0.03 in profit.
What is the relationship between ROE and earnings growth?
We’ve established that ROE is an effective profit-generating measure of a company’s future earnings. Depending on how much of its profits a company chooses to reinvest or “retain”, we are then able to evaluate a company’s ability to generate profits in the future. Generally speaking, other things being equal, companies that have a higher return on equity and profit retention, have higher growth rates than companies that don’t share these attributes.
Byke Hospitality Profit Growth vs. 3.4% ROE Side-by-side Comparison
As you can see, Byke Hospitality’s ROE looks quite weak. Not only that, but the company’s ROE is completely unremarkable even when compared to the industry average of 12%. Considering this situation, it’s no surprise that Byke Hospitality’s net profit has declined significantly by 8.5% over the past five years. We believe there may be other aspects that are negatively impacting the company’s earnings prospects. For example, the business’s capital allocation is inappropriate, or the company’s dividend payout ratio is very high.
However, when we compare Byke Hospitality’s growth to the industry, we find that while the company’s profits have been shrinking, industry profits have grown 32% over the same period. This is quite worrying.
Earnings growth is an important metric to consider when evaluating a stock. The next thing investors need to determine is whether expected earnings growth, or the lack thereof, is already priced into the stock price. This can help them determine whether the stock’s future is bright or bleak. A good indicator of expected earnings growth is the price-to-earnings ratio, which determines the price the market is willing to pay for a stock based on its earnings prospects. So you might want to check whether Byke Hospitality’s P/E ratio is high or low relative to its industry.
Does Byker Hotels reinvest its profits effectively?
Since Byke Hospitality doesn’t pay any dividends, we infer that it retains all of its profits, which is quite confusing when you consider the fact that it hasn’t grown earnings. Therefore, there may be some other explanations in this regard. For example, a company’s business may be deteriorating.
generalize
Overall, we have mixed feelings about Byke Hospitality. While the company does have a high reinvestment rate, the lower ROE means that all the reinvestment doesn’t do investors any good and has a negative impact on earnings growth. All in all, we would approach this company with caution, and one way to do that is to look at the company’s risk profile. Our risk dashboard will contain the 4 risks we have identified for Byke Hospitality.
Valuation is complex, but we’re helping to make it simple.
Find out if Byke Hospitality is potentially overvalued or undervalued by checking out our comprehensive analysis, which includes Fair value estimates, risks and warnings, dividends, insider trading and financial health.
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This article from Simply Wall St is general in nature. We only use unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended to provide financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative information. Simply Wall St does not hold a position in any of the stocks mentioned.
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