Stock Analysis

Is Talbros Automotive Components Limited's (NSE:TALBROAUTO) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Published
NSEI:TALBROAUTO
Source: Shutterstock

Most readers would already be aware that Talbros Automotive Components' (NSE:TALBROAUTO) stock increased significantly by 12% over the past week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Talbros Automotive Components' ROE in this article.

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.

Check out the opportunities and risks within the IN Auto Components industry.

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 Talbros Automotive Components is:

15% = ₹488m ÷ ₹3.3b (Based on the trailing twelve months to September 2022).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.15 in profit.

What Has ROE Got To Do With Earnings Growth?

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

Talbros Automotive Components' Earnings Growth And 15% ROE

When you first look at it, Talbros Automotive Components' ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 11% which we definitely can't overlook. Especially when you consider Talbros Automotive Components' exceptional 22% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So, there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing with the industry net income growth, we found that Talbros Automotive Components' growth is quite high when compared to the industry average growth of 4.9% in the same period, which is great to see.

past-earnings-growth
NSEI:TALBROAUTO Past Earnings Growth December 9th 2022

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Talbros Automotive Components fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Talbros Automotive Components Efficiently Re-investing Its Profits?

Talbros Automotive Components' ' three-year median payout ratio is on the lower side at 6.3% implying that it is retaining a higher percentage (94%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Besides, Talbros Automotive Components has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with Talbros Automotive Components' performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 2 risks we have identified for Talbros Automotive Components by visiting our risks dashboard for free on our platform here.

Valuation is complex, but we're helping make it simple.

Find out whether Talbros Automotive Components is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis