The stock of Triveni Engineering & Industries Limited (NSE: TRIVENI) is doing well: is the market following the fundamentals?
Triveni Engineering & Industries (NSE: TRIVENI) stock is up 10% significantly 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 results. In this article, we have decided to focus on the ROE of Triveni Engineering & Industries.
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 short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
Check out our latest review for Triveni Engineering & Industries
How to calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE of Triveni Engineering & Industries is:
19% = â¹ 3.0b Ã· â¹ 16b (based on the last twelve months up to June 2021).
The “return” is the annual profit. So this means that for every 1 of its shareholder’s investments, the company generates a profit of â¹ 0.19.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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.
Profit growth for Triveni Engineering & Industries and 19% ROE
For starters, the ROE of Triveni Engineering & Industries seems acceptable. Compared to the industry’s average ROE of 11%, the company’s ROE looks quite remarkable. It is probably because of this that Triveni Engineering & Industries has been able to record a decent growth of 13% over the past five years.
As a next step, we compared the net income growth of Triveni Engineering & Industries with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 15% over the course of the same period.
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. 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 whether Triveni Engineering & Industries is trading high P / E or low P / E, relative to its industry.
Is Triveni Engineering & Industries using its profits efficiently?
Triveni Engineering & Industries’ median three-year payout ratio to shareholders is 8.3% (implying that it keeps 92% of its revenue), which is lower, so it looks like management is reinvesting massively benefits to develop its activity.
In addition, Triveni Engineering & Industries has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with its shareholders. After studying the latest consensus data from analysts, we found that the company’s future payout ratio is expected to increase to 11% over the next three years. Regardless, the future ROE of Triveni Engineering & Industries is expected to increase to 26% despite the anticipated increase in the payout rate. There could likely be other factors that could be driving future ROE growth.
Overall, we believe the performance of Triveni Engineering & Industries is quite good. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. 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 documents. Simply Wall St has no position in the mentioned stocks.
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