Has Bharat Heavy Electricals Limited (NSE:BHEL) Stock's Recent Performance Got Anything to Do With Its Financial Health?

Most readers would already know that Bharat Heavy Electricals' (NSE:BHEL) stock increased by 9.9% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Bharat Heavy Electricals' 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.

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How Is ROE Calculated?

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 Bharat Heavy Electricals is:

2.1% = ₹5.2b ÷ ₹242b (Based on the trailing twelve months to December 2024).

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 ₹0.02 in profit.

Check out our latest analysis for Bharat Heavy Electricals

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Bharat Heavy Electricals' Earnings Growth And 2.1% ROE

As you can see, Bharat Heavy Electricals' ROE looks pretty weak. Even when compared to the industry average of 14%, the ROE figure is pretty disappointing. In spite of this, Bharat Heavy Electricals was able to grow its net income considerably, at a rate of 50% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Bharat Heavy Electricals' growth is quite high when compared to the industry average growth of 32% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Bharat Heavy Electricals''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Bharat Heavy Electricals Using Its Retained Earnings Effectively?

Bharat Heavy Electricals has a three-year median payout ratio of 31% (where it is retaining 69% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Bharat Heavy Electricals is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Bharat Heavy Electricals has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 24% over the next three years. The fact that the company's ROE is expected to rise to 11% over the same period is explained by the drop in the payout ratio.

Conclusion

Overall, we feel that Bharat Heavy Electricals certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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. 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.