Supreme Petrochem Limited (NSE:SUPPETRO) shares fell but fundamentals look solid: is the market wrong?
With its stock down 12% over the past month, it’s easy to overlook Supreme Petrochem (NSE: SUPPETRO). However, a closer look at his healthy finances might make you think again. Since fundamentals generally determine long-term market outcomes, the company is worth looking into. Specifically, we decided to study Supreme Petrochem’s ROE in this article.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Check out our latest analysis for Supreme Petrochem
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, Supreme Petrochem’s ROE is:
55% = ₹6.7 billion ÷ ₹12 billion (based on the last twelve months to December 2021).
The “yield” is the amount earned after tax over the last twelve months. This means that for every ₹1 of equity, the company generated ₹0.55 of profit.
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. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
Profit growth and 55% ROE of Supreme Petrochem
First, we recognize that Supreme Petrochem has a significantly high ROE. Second, even when compared to the industry average of 16%, the company’s ROE is quite impressive. In these circumstances, one had to expect a considerable growth of the net profit over five years of 39% of Supreme Petrochem.
As a next step, we compared Supreme Petrochem’s net income growth with the industry, and fortunately, we found that the growth the company saw was above the industry average growth of 19%.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. If you’re wondering about Supreme Petrochem’s valuation, check out this indicator of its price-earnings ratio, relative to its industry.
Does Supreme Petrochem use its profits efficiently?
Supreme Petrochem has a three-year median payout ratio of 27% (where it keeps 73% of its revenue), which is neither too low nor too high. On the face of it, the dividend is well covered and Supreme Petrochem is effectively reinvesting its earnings, as evidenced by its exceptional growth discussed above.
Also, Supreme Petrochem has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.
Overall, we are quite satisfied with Supreme Petrochem’s performance. In particular, it is good to see that the company is investing heavily in its business, and together with a high rate of return, this has led to significant growth in its profits. If the company continues to increase its earnings as it has, it could have a positive impact on its share price given how earnings per share influence prices over the long term. Remember that the price of a stock also depends on the perceived risk. Therefore, investors should be aware of the risks involved before investing in a company. Our risk dashboard will contain the 1 risk we have identified for Supreme Petrochem.
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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.