Do Its Financials Have Any Role To Play In Driving Sundaram Brake Linings Limited's (NSE:SUNDRMBRAK) Stock Up Recently?

Sundaram Brake Linings' (NSE:SUNDRMBRAK) stock is up by a considerable 12% over the past week. 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. 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Sundaram Brake Linings is:

4.6% = ₹44m ÷ ₹972m (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.05 in profit.

See our latest analysis for Sundaram Brake Linings

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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Sundaram Brake Linings' Earnings Growth And 4.6% ROE

It is quite clear that Sundaram Brake Linings' ROE is rather low. Even compared to the average industry ROE of 12%, the company's ROE is quite dismal. Sundaram Brake Linings was still able to see a decent net income growth of 17% over the past five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Sundaram Brake Linings' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 29% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Sundaram Brake Linings is trading on a high P/E or a low P/E, relative to its industry.

Is Sundaram Brake Linings Making Efficient Use Of Its Profits?

In Sundaram Brake Linings' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 7.8% (or a retention ratio of 92%), which suggests that the company is investing most of its profits to grow its business.

While Sundaram Brake Linings has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Summary

Overall, we feel that Sundaram Brake Linings certainly does have some positive factors to consider. That is, a decent growth in earnings backed by a high rate of reinvestment. However, we do feel that that earnings growth could have been higher if the business were to improve on the low ROE rate. Especially given how the company is reinvesting a huge chunk of its profits. 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. Our risks dashboard would have the 3 risks we have identified for Sundaram Brake Linings.

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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.