Apollo Micro Systems Limited (NSE:APOLLO) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Most readers would already be aware that Apollo Micro Systems' (NSE:APOLLO) stock increased significantly by 27% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Apollo Micro Systems' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Apollo Micro Systems

How To Calculate Return On Equity?

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 Apollo Micro Systems is:

4.1% = ₹123m ÷ ₹3.0b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.04 in profit.

Why Is ROE Important For 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. 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.

Apollo Micro Systems' Earnings Growth And 4.1% ROE

It is hard to argue that Apollo Micro Systems' ROE is much good in and of itself. Even when compared to the industry average of 13%, the ROE figure is pretty disappointing. Therefore, Apollo Micro Systems' flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

Next, on comparing with the industry net income growth, we found that Apollo Micro Systems' reported growth was lower than the industry growth of 5.5% in the same period, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Apollo Micro Systems''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Apollo Micro Systems Efficiently Re-investing Its Profits?

Apollo Micro Systems has a low three-year median payout ratio of 7.2% (or a retention ratio of 93%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

In addition, Apollo Micro Systems only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Conclusion

On the whole, we feel that the performance shown by Apollo Micro Systems can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Apollo Micro Systems' past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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