Stock Analysis

Endurance Technologies Limited (NSE:ENDURANCE) On An Uptrend: Could Fundamentals Be Driving The Stock?

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NSEI:ENDURANCE
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Endurance Technologies' (NSE:ENDURANCE) stock is up by 4.8% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Endurance Technologies' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Our analysis indicates that ENDURANCE is potentially overvalued!

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Endurance Technologies is:

12% = ₹4.7b ÷ ₹40b (Based on the trailing twelve months to September 2022).

The 'return' is the yearly profit. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.12 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Endurance Technologies' Earnings Growth And 12% ROE

When you first look at it, Endurance Technologies' ROE doesn't look that attractive. However, its ROE is similar to the industry average of 11%, so we won't completely dismiss the company. On the other hand, Endurance Technologies reported a fairly low 4.7% net income growth over the past five years. Bear in mind, the company's ROE is not very high . So this could also be one of the reasons behind the company's low growth in earnings.

We then performed a comparison between Endurance Technologies' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 4.9% in the same period.

past-earnings-growth
NSEI:ENDURANCE Past Earnings Growth December 8th 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Endurance Technologies fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Endurance Technologies Making Efficient Use Of Its Profits?

Endurance Technologies has a low three-year median payout ratio of 14% (meaning, the company keeps the remaining 86% of profits) which means that the company is retaining more of its earnings. However, the low earnings growth number doesn't reflect this fact. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Endurance Technologies has paid dividends over a period of six years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 13% of its profits over the next three years. However, Endurance Technologies' ROE is predicted to rise to 19% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we feel that Endurance Technologies certainly does have some positive factors to consider. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. 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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