Ramco Systems Limited (NSE: RAMCOSYS) shares have experienced strong momentum: does this require a more in-depth study of its financial outlook?

Ramco Systems (NSE: RAMCOSYS) stock has risen 20% in the past month. We ask ourselves if and what role company financials are playing in this price change, because a company’s long-term fundamentals usually dictate market outcomes. Specifically, we decided to study the ROE of Ramco Systems 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 short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.

See our latest review for Ramco Systems

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 of Ramco Systems is:

0.6% = ₹ 41m ÷ ₹ 6.4b (Based on the last twelve months up to September 2021).

The “return” is the income the business has earned over the past year. Another way to look at this is that for every 1 value of equity, the company was able to make ₹ 0.01 in profit.

What is the relationship between ROE and 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 its efficiency, 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 usually the ones that have a higher growth rate than companies that do not have the same characteristics.

Ramco Systems profit growth and 0.6% ROE

It is difficult to say that the ROE of Ramco Systems is very good on its own. Not only that, even compared to the industry average of 12%, the company’s ROE is quite unremarkable. However, we can see that Ramco Systems has experienced modest net income growth of 14% over the past five years. We believe that there could be other aspects that positively influence the company’s profit growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.

We then performed a comparison between the growth of Ramco Systems’ net income with the industry, which found that the growth of the company is similar to the industry average growth of 15% during the same period.

Profit growth is a huge factor in the valuation of stocks. 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 Ramco Systems’ value fair compared to other companies? These 3 evaluation measures could help you decide.

Is Ramco Systems Using Retained Earnings Efficiently?

Ramco Systems does not currently pay any dividends, which essentially means that it has reinvested all of its profits back into the business. It certainly contributes to the decent profit growth figure we discussed above.

Conclusion

Overall, we think Ramco Systems has some positive attributes. With a high reinvestment rate, but low ROE, the company has managed to see considerable growth in profits. That said, the latest forecasts from industry analysts show that the company’s profits are expected to pick up. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.

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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.