Is Minda Industries Limited's (BOM:532539) 20.64% ROE Strong Compared To Its Industry?

By
Simply Wall St
Published
June 13, 2018
BSE:532539

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in Minda Industries Limited (BOM:532539).

With an ROE of 20.64%, Minda Industries Limited (BOM:532539) outpaced its own industry which delivered a less exciting 13.75% over the past year. Though, the impressiveness of 532539’s ROE is contingent on whether this industry-beating level can be sustained. This can be measured by looking at the company’s financial leverage. With more debt, 532539 can invest even more and earn more money, thus pushing up its returns. However, ROE only measures returns against equity, not debt. This can be distorted, so let’s take a look at it further. View out our latest analysis for Minda Industries

Peeling the layers of ROE – trisecting a company’s profitability

Return on Equity (ROE) weighs Minda Industries’s profit against the level of its shareholders’ equity. For example, if the company invests ₹1 in the form of equity, it will generate ₹0.21 in earnings from this. If investors diversify their portfolio by industry, they may want to maximise their return in the Auto Parts and Equipment sector by investing in the highest returning stock. However, this can be deceiving as each company has varying costs of equity and debt levels, which could exaggeratedly push up ROE at the same time as accumulating high interest expense.

Return on Equity = Net Profit ÷ Shareholders Equity

ROE is measured against cost of equity in order to determine the efficiency of Minda Industries’s equity capital deployed. Its cost of equity is 13.55%. Since Minda Industries’s return covers its cost in excess of 7.10%, its use of equity capital is efficient and likely to be sustainable. Simply put, Minda Industries pays less for its capital than what it generates in return. ROE can be broken down into three different ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Dupont Formula

ROE = profit margin × asset turnover × financial leverage

ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)

ROE = annual net profit ÷ shareholders’ equity

BSE:532539 Last Perf June 13th 18
BSE:532539 Last Perf June 13th 18

Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover shows how much revenue Minda Industries can generate with its current asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. We can determine if Minda Industries’s ROE is inflated by borrowing high levels of debt. Generally, a balanced capital structure means its returns will be sustainable over the long run. We can examine this by looking at Minda Industries’s debt-to-equity ratio. Currently the ratio stands at 33.87%, which is very low. This means Minda Industries has not taken on leverage, and its above-average ROE is driven by its ability to grow its profit without a huge debt burden.

BSE:532539 Historical Debt June 13th 18
BSE:532539 Historical Debt June 13th 18

Next Steps:

ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Minda Industries’s above-industry ROE is encouraging, and is also in excess of its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. Although ROE can be a useful metric, it is only a small part of diligent research.

For Minda Industries, I've put together three important factors you should further examine:

  1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Valuation: What is Minda Industries worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Minda Industries is currently mispriced by the market.
  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Minda Industries? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

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Simply Wall St has no position in any of the companies mentioned. This article 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.
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