Does the impressive performance of Indian Metals and Ferro Alloys Limited (NSE: IMFA) stocks have something to do with its fundamentals?
Most readers already know that Indian Metals and Ferro Alloys (NSE: IMFA) stock has increased significantly by 37% in the past three months. As most know, fundamentals generally guide long-term market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play in the recent one. price movement. In particular, we will be paying particular attention to the ROE of Indian Metals and Ferro Alloys today.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest analysis for Indian metals and ferrous alloys
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Indian metals and ferrous alloys is:
19% = ₹ 2.4b ÷ ₹ 13b (Based on the last twelve months up to June 2021).
The “return” is the annual profit. This means that for every having shareholders, the company generated 0.19 profit.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the business is reinvesting or “holding back” for future growth, which then gives us an idea of the growth potential of the business. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
A Side-by-Side Comparison of Indian Metals and Ferrous Alloys Profit Growth and 19% ROE
At first glance, Indian Metals and Ferro Alloys appear to have a decent ROE. Especially compared to the industry average of 15%, the company’s ROE looks pretty impressive. Needless to say, we’re quite surprised to see that Indian Metals and Ferro Alloys’ bottom line has declined 20% over the past five years. We believe there might be other factors at play here that are preventing the growth of the business. For example, the company pays out a large portion of its profits as dividends or faces competitive pressures.
That being said, we compared the performance of Indian Metals and Ferro Alloys with that of the industry and we were concerned that although the company reduced its profits, the industry increased its profits to a rate of 14% over the same period.
Profit growth is a huge factor in the valuation of stocks. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. In doing so, he will have an idea if the action is heading for clear blue waters or swampy waters ahead. 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 Indian Metals and Ferro Alloys is trading high P / E or low P / E, relative to its industry.
Are Indian Metals and Ferrous Alloys Efficiently Using Their Retained Profits?
Indian Metals and Ferro Alloys’ low LTM payout ratio (or the last twelve months) of 11% (implying that it keeps the remaining 89% of its profits) is a surprise when you associate it with the decline in profits. . The low payout should mean that the business keeps most of its profits and, therefore, should experience some growth. There could therefore be other explanations in this regard. For example, the business of the company can deteriorate.
Additionally, Indian Metals and Ferro Alloys has paid dividends over a period of at least ten years, suggesting that sustaining dividend payments is much more important to management, even if it comes at the expense of growth. of the company.
Overall, we think Indian Metals and Ferro Alloys certainly have some positive factors to consider. Still, the weak earnings growth is a bit of a concern, especially since the company has a high rate of return and is reinvesting a huge chunk of its earnings. At first glance, there could be other factors, which do not necessarily control the business, which are preventing growth. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. To learn about the 4 risks we have identified for Indian metals and ferrous alloys, visit our free risk dashboard.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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