It’s actually a high ROE business, my friend. The details and nuances of accounting can sometimes obscure these gems from the standard screens used by average retail investors like us.
In 2017, the company revaluated its fixed assets on the balance sheet. What does that mean? Imagine you started a business in 1990 with land and machinery valued at 100 Cr. That investment stays on the balance sheet at its original cost until, say, 2017, when you decide to revalue your fixed assets. This revaluation might occur because the land (though not necessarily the building) has appreciated over time due to general inflation. So, the land that was worth 100 Cr. in 1990 might now be valued at 1500 Cr. in 2017. By revaluing your fixed assets, you increase the value on the asset side of the balance sheet, and since it’s a balance sheet, you adjust this with your reserves on the liabilities side.
Companies may revalue their assets for various reasons, such as M&A or maybe debt obligations, though I might not know the specific reason in this case. However, this revaluation increases the denominator in the ROE (equity capital + reserves) calculation, while the numerator (Net Profit) remains largely unaffected.
Many of the high ROE companies we admire today are evaluated based on historical costs rather than current values. If you were to revalue the balance sheets of companies like Asian Paints or Pidilite, which have been around for 30+ years, you might not see those impressive 25%+ ROE numbers. ROE tells us the return on the actual or initial investment, and revaluation can significantly alter this picture.
Subscribe To Our Free Newsletter |