Shree Cement Inc (NSE: SHREECEM) had a tough three months with its share price down 16%. But if you pay close attention, you might realize that its strong financials could mean the stock could potentially see a long-term rise in value, as the markets generally reward companies in good financial shape. In particular, we will be paying attention to Shree Cement’s ROE today.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
Check out our latest analysis for Shree Cement
How is ROE calculated?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Shree Cement is:
16% = ₹26 billion ÷ ₹165 billion (based on the last twelve months to September 2021).
The “yield” is the amount earned after tax over 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 ₹0.16.
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. 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.
Shree Cement earnings growth and 16% ROE
For starters, Shree Cement seems to have a respectable ROE. Compared to the industry average ROE of 12%, the company’s ROE looks quite remarkable. It certainly adds some context to Shree Cement’s decent 19% net income growth over the past five years.
As a next step, we benchmarked Shree Cement’s net income growth with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 20% over the past year. the same period.
Earnings growth is an important metric to consider when evaluating a stock. 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 Shree Cement is trading on a high P/E or a low P/E, relative to its industry.
Does Shree Cement effectively reinvest its profits?
In the case of Shree Cement, its respectable earnings growth can likely be explained by its low three-year median payout ratio of 13% (or a retention rate of 87%), suggesting that the company is investing the most of its profits to expand its business. .
Additionally, Shree Cement is committed to continuing to share its profits with shareholders, which we infer from its long history of paying dividends for at least ten years. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 13%. As a result, forecasts suggest that Shree Cement’s future ROE will be 16%, which is again similar to today’s ROE.
All in all, we are quite satisfied with the performance of Shree Cement. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive earnings growth. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization 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.