Could The Market Be Wrong About Ahluwalia Contracts (India) Limited (NSE:AHLUCONT) Given Its Attractive Financial Prospects?

With its stock down 14% over the past three months, it is easy to disregard Ahluwalia Contracts (India) (NSE:AHLUCONT). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Ahluwalia Contracts (India)'s 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Ahluwalia Contracts (India)

How To Calculate Return On Equity?

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 Ahluwalia Contracts (India) is:

20% = ₹3.4b ÷ ₹17b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.20 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. 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.

Ahluwalia Contracts (India)'s Earnings Growth And 20% ROE

To start with, Ahluwalia Contracts (India)'s ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 13%. Probably as a result of this, Ahluwalia Contracts (India) was able to see an impressive net income growth of 36% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing Ahluwalia Contracts (India)'s net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 31% over the last few years.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Ahluwalia Contracts (India) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Ahluwalia Contracts (India) Making Efficient Use Of Its Profits?

Ahluwalia Contracts (India)'s three-year median payout ratio to shareholders is 1.3%, which is quite low. This implies that the company is retaining 99% of its profits. So it looks like Ahluwalia Contracts (India) is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Ahluwalia Contracts (India) is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 1.2%. As a result, Ahluwalia Contracts (India)'s ROE is not expected to change by much either, which we inferred from the analyst estimate of 17% for future ROE.

Conclusion

In total, we are pretty happy with Ahluwalia Contracts (India)'s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.