Is Suprajit Engineering Limited's(NSE:SUPRAJIT) Recent Stock Performance Tethered To Its Strong Fundamentals?

Suprajit Engineering's (NSE:SUPRAJIT) stock is up by a considerable 25% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Suprajit Engineering's ROE in this article.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Suprajit Engineering

How Do You 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 Suprajit Engineering is:

7.6% = ₹646m ÷ ₹8.5b (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.08 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Suprajit Engineering's Earnings Growth And 7.6% ROE

As you can see, Suprajit Engineering's ROE looks pretty weak. Still, the company's ROE is higher than the average industry ROE of 5.4% so that's certainly interesting. And more so given that Suprajit Engineering has grown its net income at an acceptable rate of 12%. That being said, the company does have a low ROE to begin with, just that its higher than the industry average. So there might well be other reasons for the earnings to grow. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Suprajit Engineering's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 5.2% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Suprajit Engineering fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Suprajit Engineering Using Its Retained Earnings Effectively?

Suprajit Engineering has a low three-year median payout ratio of 14%, meaning that the company retains the remaining 86% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Additionally, Suprajit Engineering has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 16% of its profits over the next three years. Still, forecasts suggest that Suprajit Engineering's future ROE will rise to 15% even though the the company's payout ratio is not expected to change by much.

Summary

In total, we are pretty happy with Suprajit Engineering's performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

If you decide to trade Suprajit Engineering, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.