Is Suprajit Engineering Limited's (NSE:SUPRAJIT) Stock's Recent Performance A Reflection Of Its Financial Health?

Suprajit Engineering's (NSE:SUPRAJIT) stock up by 4.9% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Suprajit Engineering's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Suprajit Engineering

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 Suprajit Engineering is:

7.6% = ₹677m ÷ ₹8.9b (Based on the trailing twelve months to September 2020).

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 ₹0.08 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Suprajit Engineering's Earnings Growth And 7.6% ROE

It is quite clear that Suprajit Engineering's ROE is rather low. However, when compared to the industry average of 5.4%, we do feel there's definitely more to the company. And more so given that Suprajit Engineering has grown its net income at an acceptable rate of 7.4%. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. Such as high earnings retention or an efficient management in place.

As a next step, we compared Suprajit Engineering's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 2.9%.

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. If you're wondering about Suprajit Engineering's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Suprajit Engineering Making Efficient Use Of Its Profits?

In Suprajit Engineering's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 15% (or a retention ratio of 85%), which suggests that the company is investing most of its profits to grow its business.

Moreover, Suprajit Engineering is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 16% of its profits over the next three years. However, Suprajit Engineering's ROE is predicted to rise to 16% despite there being no anticipated change in its payout ratio.

Conclusion

On the whole, we feel that Suprajit Engineering's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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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