Are Strong Financial Prospects The Force That Is Driving The Momentum In Associated Alcohols & Breweries Limited's NSE:ASALCBR) Stock?

Associated Alcohols & Breweries' (NSE:ASALCBR) stock is up by a considerable 23% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Associated Alcohols & Breweries' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Associated Alcohols & Breweries

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Associated Alcohols & Breweries is:

25% = ₹493m ÷ ₹2.0b (Based on the trailing twelve months to March 2020).

The 'return' is the profit over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.25 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Associated Alcohols & Breweries' Earnings Growth And 25% ROE

To begin with, Associated Alcohols & Breweries seems to have a respectable ROE. On comparing with the average industry ROE of 6.4% the company's ROE looks pretty remarkable. Probably as a result of this, Associated Alcohols & Breweries was able to see an impressive net income growth of 28% over the last five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Associated Alcohols & Breweries' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 27% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is ASALCBR fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Associated Alcohols & Breweries Making Efficient Use Of Its Profits?

Associated Alcohols & Breweries has a really low three-year median payout ratio of 7.2%, meaning that it has the remaining 93% left over to reinvest into its business. So it looks like Associated Alcohols & Breweries is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Associated Alcohols & Breweries is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend.

Summary

On the whole, we feel that Associated Alcohols & Breweries' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 2 risks we have identified for Associated Alcohols & Breweries.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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