It’s hard to get excited after watching the recent performance of Indian Hume Pipe (NSE:INDIANHUME), as its stock is down 28% in the past three months. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In this article, we have decided to focus on the ROE of Indian Hume Pipe.
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.
See our latest review for Indian Hume Pipe
How to calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Indian Hume Pipe is:
8.9% = ₹578 million ÷ ₹6.5 billion (based on the last twelve months to March 2022).
“Yield” refers to a company’s earnings over the past year. Another way to think about this is that for every ₹1 worth of equity, the company was able to make a profit of ₹0.09.
What does ROE have to do with earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s 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.
Earnings growth and ROE of 8.9% from Indian Hume Pipe
At first glance, the ROE of Indian Hume Pipe is not much to tell. However, the fact that its ROE is well above the industry average of 7.0% does not go unnoticed by us. But again, seeing that Indian Hume Pipe’s net income has declined by 11% over the past five years makes us think again. Keep in mind that the company has a slightly low ROE. It’s just that the industry’s ROE is lower. Therefore, lower revenue could also be the result.
So, as a next step, we benchmarked Indian Hume Pipe’s performance against the industry and were disappointed to find that while the company was cutting profits, the industry was increasing profits at a rate of 3.7% over the same period.
Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the stock is set 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. So, you might want to check if Indian Hume Pipe is trading on a high P/E or on a low P/E, relative to its industry.
Does Indian Hume Pipe make effective use of its retained earnings?
When we piece together Indian Hume Pipe’s low median three-year payout ratio of 18% (where it retains 82% of its earnings), calculated for the last three-year period, we are surprised at the lack of growth. This should generally not be the case when a company retains most of its profits. So there could be other explanations for this. For example, the company’s business may deteriorate.
Additionally, Indian Hume Pipe has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of company growth. ‘company.
Overall, we feel that Indian Hume Pipe has positive attributes. Still, the weak earnings growth is a bit of a concern, especially since the company has a respectable rate of return and reinvests a huge portion of its earnings. At first glance, there could be other factors, which do not necessarily control the business, that are preventing growth. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. To learn about the 5 risks we have identified for Indian Hume Pipe, visit our Risk Dashboard for free.
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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.