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Do Its Financials Have Any Role To Play In Driving Sundaram Brake Linings Limited's (NSE:SUNDRMBRAK) Stock Up Recently?
Most readers would already be aware that Sundaram Brake Linings' (NSE:SUNDRMBRAK) stock increased significantly by 46% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Sundaram Brake Linings' ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Sundaram Brake Linings
How Do You 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 Sundaram Brake Linings is:
6.9% = ₹67m ÷ ₹972m (Based on the trailing twelve months to September 2024).
The 'return' refers to a company's earnings over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.07.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Sundaram Brake Linings' Earnings Growth And 6.9% ROE
It is quite clear that Sundaram Brake Linings' ROE is rather low. Not just that, even compared to the industry average of 12%, the company's ROE is entirely unremarkable. Sundaram Brake Linings was still able to see a decent net income growth of 13% over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing with the industry net income growth, we found that Sundaram Brake Linings' reported growth was lower than the industry growth of 27% over the last few years, which is not something we like to see.
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. If you're wondering about Sundaram Brake Linings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Sundaram Brake Linings Using Its Retained Earnings Effectively?
Sundaram Brake Linings has a low three-year median payout ratio of 7.8%, meaning that the company retains the remaining 92% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Along with seeing a growth in earnings, Sundaram Brake Linings only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.
Summary
Overall, we feel that Sundaram Brake Linings certainly does have some positive factors to consider. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 3 risks we have identified for Sundaram Brake Linings by visiting our risks dashboard for free on our platform here.
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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.
About NSEI:SUNDRMBRAK
Sundaram Brake Linings
Manufactures and sells asbestos free friction materials in India and internationally.
Proven track record low.