Is the recent performance of Apcotex Industries Limited (NSE:APCOTEXIND) shares related to its strong fundamentals?

Apcotex Industries (NSE:APCOTEXIND) has had a strong run in the stock market with a significant 25% rise in its stock over the past month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. Specifically, we decided to study the ROE of Apcotex Industries in this article.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simple terms, it is used to assess the profitability of a company in relation to its equity.

See our latest analysis for Apcotex Industries

How is ROE calculated?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for Apcotex Industries is:

26% = ₹905m ÷ ₹3.5b (Based on last twelve months to December 2021).

The “return” is the annual profit. This means that for every ₹ of equity, the company generated ₹0.26 of profit.

What does ROE have to do with 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. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.

Apcotex Industries earnings growth and ROE of 26%

For starters, Apcotex Industries seems to have a respectable ROE. Compared to the industry average ROE of 16%, the company’s ROE looks quite remarkable. This certainly adds some context to Apcotex Industries’ decent 14% net income growth over the past five years.

Then, when comparing with industry net income growth, we found that Apcotex Industries’ reported growth was lower than industry growth of 21% over the same period, which we don’t don’t like to see.

NSEI: APCOTEXIND Past Earnings Growth April 20, 2022

Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. If you’re wondering about Apcotex Industries’ valuation, check out this indicator of its price-earnings ratio, relative to its industry.

Does Apcotex Industries effectively reinvest its profits?

Apcotex Industries has a three-year median payout ratio of 33%, implying that it retains the remaining 67% of its earnings. This suggests that its dividend is well covered and, given the decent growth the company has seen, it looks like management is reinvesting its earnings effectively.

Also, Apcotex Industries has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite satisfied with the performance of Apcotex Industries. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course led the company to see good growth in profits. That said, the latest analyst forecasts show that the company will continue to see earnings expansion. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

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.

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