Divgi TorqTransfer Systems Limited (NSE:DIVGIITTS) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Divgi TorqTransfer Systems' (NSE:DIVGIITTS) stock is up by a considerable 18% over the past month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Divgi TorqTransfer Systems' ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Divgi TorqTransfer Systems is:

4.8% = ₹282m ÷ ₹5.9b (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.05 in profit.

Check out our latest analysis for Divgi TorqTransfer Systems

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of Divgi TorqTransfer Systems' Earnings Growth And 4.8% ROE

As you can see, Divgi TorqTransfer Systems' ROE looks pretty weak. Even compared to the average industry ROE of 12%, the company's ROE is quite dismal. Hence, the flat earnings seen by Divgi TorqTransfer Systems over the past five years could probably be the result of it having a lower ROE.

We then compared Divgi TorqTransfer Systems' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 28% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Divgi TorqTransfer Systems''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Divgi TorqTransfer Systems Making Efficient Use Of Its Profits?

Divgi TorqTransfer Systems' low three-year median payout ratio of 20% (implying that the company keeps80% of its income) should mean that the company is retaining most of its earnings to fuel its growth and this should be reflected in its growth number, but that's not the case.

Additionally, Divgi TorqTransfer Systems started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 21% of its profits over the next three years. Still, forecasts suggest that Divgi TorqTransfer Systems' future ROE will rise to 6.9% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we have mixed feelings about Divgi TorqTransfer Systems. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.