Is The Market Rewarding Asian Granito India Limited (NSE:ASIANTILES) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

It is hard to get excited after looking at Asian Granito India's (NSE:ASIANTILES) recent performance, when its stock has declined 4.2% over the past three months. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Asian Granito India's ROE in this article.

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.

See our latest analysis for Asian Granito India

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 Asian Granito India is:

5.3% = ₹300m ÷ ₹5.7b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.05.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Asian Granito India's Earnings Growth And 5.3% ROE

It is quite clear that Asian Granito India's ROE is rather low. Even when compared to the industry average of 8.0%, the ROE figure is pretty disappointing. As a result, Asian Granito India's flat earnings over the past five years doesn't come as a surprise given its lower ROE.

We then compared Asian Granito India's net income growth with the industry and found that the average industry growth rate was 10% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. 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 Asian Granito India is trading on a high P/E or a low P/E, relative to its industry.

Is Asian Granito India Using Its Retained Earnings Effectively?

Asian Granito India has a low three-year median payout ratio of 5.3% (or a retention ratio of 95%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

Moreover, Asian Granito India has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

Overall, we have mixed feelings about Asian Granito India. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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