Powergrid Infrastructure Investment Trust (NSE:PGINVIT) stock is up 4.7% over the past three months. Since stock prices are generally aligned with a company’s financial performance over the long term, we decided to investigate whether the company’s decent financials had a role to play in the recent price movement. Specifically, we decided to study the ROE of Powergrid Infrastructure Investment Trust in this article.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest analysis for Powergrid Infrastructure Investment Trust
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 Powergrid Infrastructure Investment Trust is:
4.7% = ₹4.6 billion ÷ ₹99 billion (based on the last twelve months to March 2022).
“Yield” is the income the business has earned over the past year. This therefore means that for every ₹1 of its shareholder’s investment, the company generates a profit of ₹0.05.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. 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. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Powergrid Infrastructure Investment Trust’s 4.7% earnings and ROE growth
It is clear that the ROE of Powergrid Infrastructure Investment Trust is rather weak. Even compared to the industry average ROE of 5.9%, the company’s ROE is pretty dismal. Despite this, surprisingly, Powergrid Infrastructure Investment Trust has recorded exceptional net profit growth of 31% over the past five years. We feel there could be other factors at play here. 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.
In a next step, we benchmarked the growth of Powergrid Infrastructure Investment Trust’s net income with the industry, and fortunately, we found that the growth seen by the company is above the industry average growth of 7, 4%.
Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about the valuation of Powergrid Infrastructure Investment Trust, check out this indicator of its price/earnings ratio, relative to its sector.
Does Powergrid Infrastructure Investment Trust effectively reinvest its profits?
Powergrid Infrastructure Investment Trust’s three-year median payout ratio to shareholders is 24%, which is quite low. This implies that the company retains 76% of its profits. So it looks like Powergrid Infrastructure Investment Trust is massively reinvesting its earnings to grow its business, which is reflected in its earnings growth.
Although Powergrid Infrastructure Investment Trust has seen earnings growth, it has only recently started paying a dividend. Chances are the company has decided to impress new and existing shareholders with a dividend.
All in all, it looks like Powergrid Infrastructure Investment Trust has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in its profits. 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. Our risk dashboard would include the 2 risks we have identified for Powergrid Infrastructure Investment Trust.
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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.