Most readers will already know that Finolex Cables (NSE: FINCABLES) stock is up a significant 13% over the past week. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. In this article, we have decided to focus on the ROE of Finolex Cables.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Check out our latest analysis for Finolex cables
How is ROE calculated?
The ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Finolex Cables is:
15% = ₹6.0 billion ÷ ₹39 billion (based on the last twelve months to March 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 ₹0.15.
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 gauge a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
A Side-by-Side Comparison of Finolex Cables Earnings Growth and 15% ROE
For starters, Finolex Cables’ ROE looks acceptable. Compared to the industry average ROE of 10%, the company’s ROE looks quite remarkable. This likely laid the foundation for Finolex Cables’ moderate 8.7% net income growth seen over the past five years.
We then performed a comparison of Finolex Cables’ net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 7.6% over the same period.
Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. 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. Thus, you might want to check whether Finolex Cables is trading on a high P/E or a low P/E, relative to its industry.
Does Finolex Cables use its profits efficiently?
Finolex Cables has a low three-year median payout ratio of 18%, which means the company keeps the remaining 82% of its profits. This suggests that the management reinvests most of the profits to grow the business.
Moreover, Finolex Cables has paid dividends over a period of at least ten years, which means that the company is quite serious about sharing its profits with shareholders. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out about 16% of its earnings over the next three years. As a result, the company’s future ROE is also not expected to change much, with analysts predicting an ROE of 15%.
Overall, we are quite satisfied with the performance of Finolex Cables. In particular, it is good to see that the company is investing heavily in its business, and together with a high rate of return, this has led to significant growth in its profits. That said, the company’s earnings growth is expected to slow, as expected in current analyst estimates. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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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.