It’s hard to get excited after watching the recent performance of JK Cement (NSE:JKCEMENT), as its stock is down 1.2% over the past week. 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 this article, we decided to focus on the ROE of JK Cement.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
See our latest review for JK Cement
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for JK Cement is:
20% = ₹7.7 billion ÷ ₹39 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 ₹0.20.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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.
JK Cement profit growth and 20% ROE
For starters, JK Cement’s ROE looks acceptable. Especially when compared to the industry average of 12%, the company’s ROE looks pretty impressive. Probably because of this, JK Cement has been able to see an impressive net profit growth of 30% over the past five years. We believe that there could also be other aspects that positively influence the company’s earnings growth. Such as – high revenue retention or effective management in place.
We then compared the net income growth of JK Cement with the industry and we are glad to see that the growth figure of the company is higher compared to the industry which has a growth rate of 20% in during 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. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Is JK Cement correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does JK Cement effectively reinvest its profits?
JK Cement’s three-year median payout ratio to shareholders is 16%, which is quite low. This implies that the company retains 84% of its profits. So it looks like JK Cement is massively reinvesting its profits to grow its business, which is reflected in its profit growth.
In addition, JK Cement is determined to continue sharing its profits with shareholders, which we infer from its long history of paying dividends for at least ten years. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to remain stable at 15%. As a result, JK Cement’s ROE is not expected to change much either, which we inferred from analysts’ estimate of 21% for future ROE.
Overall, we believe JK Cement’s performance has been quite good. 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, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. 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.