Can Shriram Pistons & Rings Limited (NSE:SHRIPISTON) Performance Keep Up Given Its Mixed Bag Of Fundamentals?

Most readers would already know that Shriram Pistons & Rings' (NSE:SHRIPISTON) stock increased by 2.2% over the past month. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement In this article, we decided to focus on Shriram Pistons & Rings' 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Shriram Pistons & Rings

How Is ROE Calculated?

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 Shriram Pistons & Rings is:

7.7% = ₹888m ÷ ₹11b (Based on the trailing twelve months to March 2021).

The 'return' is the yearly profit. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.08 in profit.

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. 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.

Shriram Pistons & Rings' Earnings Growth And 7.7% ROE

It is hard to argue that Shriram Pistons & Rings' ROE is much good in and of itself. Further, we noted that the company's ROE is similar to the industry average of 7.1%. Therefore, it might not be wrong to say that the five year net income decline of 17% seen by Shriram Pistons & Rings was possibly a result of the disappointing ROE.

As a next step, we compared Shriram Pistons & Rings' performance with the industry and found thatShriram Pistons & Rings' performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 3.2% in the same period, which is a slower than the company.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Shriram Pistons & Rings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shriram Pistons & Rings Efficiently Re-investing Its Profits?

Shriram Pistons & Rings' low three-year median payout ratio of 17% (implying that it retains the remaining 83% of its profits) comes as a surprise when you pair it with the shrinking earnings. The low payout should mean that the company is retaining most of its earnings and consequently, should see some growth. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Shriram Pistons & Rings has paid dividends over a period of four years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Conclusion

On the whole, we feel that the performance shown by Shriram Pistons & Rings can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 2 risks we have identified for Shriram Pistons & Rings visit our risks dashboard for free.

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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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