Does the impressive performance of Marine Electricals (India) Limited (NSE:MARINE) shares have something to do with its fundamentals?
Most readers will already know that Marine Electricals (India) (NSE:MARINE) stock is up a significant 14% over the past three months. Since stock prices are usually aligned with a company’s financial performance over the long term, we decided to take a closer look at its financial indicators to see if they had a role to play in the recent price movement. . Specifically, we decided to study the ROE of Marine Electricals (India) in this article.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simple terms, it is used to assess the profitability of a company in relation to its equity.
Check out our latest analysis for Marine Electricity (India)
How do you calculate return on equity?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Marine Electricals (India) is:
9.2% = ₹158 million ÷ ₹1.7 billion (based on the last twelve months to December 2021).
The “return” is the annual profit. This therefore means that for every ₹1 of its shareholder’s investment, the company generates a profit of ₹0.09.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. 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.
A side-by-side comparison of Marine Electricals (India) earnings growth and ROE of 9.2%
At first glance, the ROE of Marine Electricals (India) is not a topic of conversation. Yet further investigation shows that the company’s ROE is similar to the industry average of 11%. Even so, Marine Electricals (India) showed a pretty decent growth in its net profit which grew at a rate of 5.5%. Given the moderately low ROE, it is quite possible that other aspects positively influence the company’s earnings growth. 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 Marine Electricals (India) net profit growth with the industry and were disappointed to see that the company’s growth is below the industry average growth of 7.8 % over the same period.
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 will help him determine if the future of the stock looks bright or ominous. 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 Marine Electricals (India) is trading on a high P/E or a low P/E, relative to its industry.
Is Marine Electricals (India) effectively reinvesting its profits?
Marine Electricals (India) has a low three-year median payout ratio of 19%, meaning the company retains the remaining 81% of its profits. This suggests that the management reinvests most of the profits to grow the business.
While Marine Electricals (India) has seen growth in profits, 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 seems that Marine Electricals (India) has some positive aspects of its business. In other words, decent earnings growth supported by a high rate of reinvestment. However, we believe that this earnings growth could have been higher if the company were to improve the low ROE rate. Especially considering how the company reinvests a huge portion of 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. To know the 3 risks we have identified for Marine Electricals (India) visit our risk dashboard for free.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.