Profit ratio

Should weakness in TTK Prestige Limited (NSE:TTKPRESTIG) shares be taken as a sign that the market will correct the share price given decent financials?

It’s hard to get excited after watching the recent performance of TTK Prestige (NSE:TTKPRESTIG), as its stock is down 10% 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. Concretely, we decided to study the ROE of TTK Prestige 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 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 TTK Prestige

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 TTK Prestige is:

19% = ₹3.1 billion ÷ ₹16 billion (based on the last twelve months to December 2021).

The “yield” is the amount earned after tax over the last twelve months. This therefore means that for every ₹1 of its shareholder’s investment, the company generates a profit of ₹0.19.

What is the relationship between ROE and 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.

Growth in TTK Prestige earnings and 19% ROE

At first glance, TTK Prestige seems to have a decent ROE. Especially when compared to the industry average of 11%, the company’s ROE looks pretty impressive. Despite this, TTK Prestige’s five-year net income growth has been quite weak, averaging only 4.9%. This is interesting because the high returns should mean that the company has the capacity to generate strong growth, but for some reason it has not been able to do so. A few likely reasons why this could happen are that the company might have a high payout ratio or the company has misallocated capital, for example.

We then compared TTK Prestige’s net income growth with the industry and found that the company’s growth figure is lower than the industry average growth rate of 9.3% over the same period. , which is a little worrying.

NSEI: TTKPRESTIG Past Earnings Growth April 29, 2022

Earnings growth is an important metric to consider when evaluating a stock. 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 action is placed 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 TTK Prestige is trading on a high P/E or a low P/E, relative to its industry.

Does TTK Prestige effectively reinvest its profits?

TTK Prestige has a low three-year median payout ratio of 20% (meaning the company keeps the remaining 80% of profits), which means the company keeps more of its profits. However, the low earnings growth figure does not reflect this, as high growth usually follows high earnings retention. Therefore, there could be other reasons for the lack in this regard. For example, the business might be in decline.

Additionally, TTK Prestige has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends to earnings growth. After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to reach 25% over the next three years. However, the company’s ROE is not expected to change much despite the higher expected payout ratio.

Conclusion

All in all, it seems that TTK Prestige has positive aspects for its business. Still, the weak earnings growth is a bit of a concern, especially since the company has a high 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. That said, the latest analyst forecasts show that the company will continue to see earnings expansion. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

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.