Stock Analysis

Generic Engineering Construction and Projects Limited's (NSE:GENCON) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

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NSEI:GENCON
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Most readers would already be aware that Generic Engineering Construction and Projects' (NSE:GENCON) stock increased significantly by 86% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Generic Engineering Construction and Projects' 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Generic Engineering Construction and Projects

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 Generic Engineering Construction and Projects is:

7.9% = ₹161m ÷ ₹2.0b (Based on the trailing twelve months to December 2022).

The 'return' is the yearly profit. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.08.

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.

A Side By Side comparison of Generic Engineering Construction and Projects' Earnings Growth And 7.9% ROE

As you can see, Generic Engineering Construction and Projects' ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 8.4% either. The flat earnings by Generic Engineering Construction and Projects over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Generic Engineering Construction and Projects' reported growth was lower than the industry growth of 9.4% in the same period, which is not something we like to see.

past-earnings-growth
NSEI:GENCON Past Earnings Growth March 18th 2023

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Generic Engineering Construction and Projects''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Generic Engineering Construction and Projects Efficiently Re-investing Its Profits?

Generic Engineering Construction and Projects has a low three-year median payout ratio of 1.5% (or a retention ratio of 99%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

Moreover, Generic Engineering Construction and Projects has been paying dividends for six years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

In total, we're a bit ambivalent about Generic Engineering Construction and Projects' performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Generic Engineering Construction and Projects' past profit growth, check out this visualization of past earnings, revenue and cash flows.

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