Falling stocks and decent financials: is the market wrong about Minda Industries Limited (NSE: MINDAIND)?
It’s hard to get excited after looking at the recent performance of Minda Industries (NSE: MINDAIND), as its stock has fallen 7.7% in the past week. However, the fundamentals of the company look pretty decent, and long-term financial data is generally aligned with future market price movements. In particular, we will pay particular attention to the ROE of Minda Industries today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on 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 shareholders of the company.
Check out our latest analysis for Minda Industries
How do you calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Minda Industries is:
17% = ₹ 4.2b ÷ ₹ 26b (based on the last twelve months up to June 2021).
The “return” is the profit of the last twelve months. So this means that for every 1 of its shareholder’s investments, the company generates a profit of ₹ 0.17.
Why is ROE important for profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
Minda Industries profit growth and 17% ROE
For starters, Minda Industries appears to have a respectable ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 12%. Given the circumstances, we can’t help but wonder why Minda Industries has seen little or no growth over the past five years. We believe there might be other factors at play here that are limiting the growth of the business. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.
Next, we compared the performance of Minda Industries to that of the industry and found that the industry reduced its profits to 8.1% during the same period, which suggests that the company’s profits have declined at a slower pace than its industry, while it’s not particularly good, it’s not particularly bad either.
Profit growth is an important metric to consider when valuing 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 worrisome. If you are wondering about Minda Industries’ valuation, check out this gauge of its price / earnings ratio, relative to its industry.
Is Minda Industries using its profits efficiently?
Minda Industries has a low three-year median payout rate of 11% (or retention rate of 89%) but the negligible profit growth figure does not reflect this, as high growth typically follows high profit retention. .
In addition, Minda Industries has paid dividends over a period of at least ten years, which means that the management of the company is committed to paying dividends even if it means little or no growth in earnings. Our latest analyst data shows the company’s future payout ratio is expected to drop to 8.7% over the next three years. However, the company’s ROE is not expected to change much despite the expected lower payout ratio.
All in all, it seems that Minda Industries has some positive aspects for its business. However, given the high ROE and high profit retention, we would expect the company to show strong profit growth, but this is not the case here. This suggests that there could be an external threat to the business, hampering its growth. However, the latest forecast from industry analysts shows that analysts expect a significant improvement in the company’s earnings growth rate. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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 material. Simply Wall St has no position in the mentioned stocks.
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