Hercules Hoists Limited's (NSE:HERCULES) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Hercules Hoists' (NSE:HERCULES) stock is up by a considerable 29% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Hercules Hoists' ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Hercules Hoists

How Is ROE Calculated?

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 Hercules Hoists is:

2.8% = ₹108m ÷ ₹3.9b (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.03 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Hercules Hoists' Earnings Growth And 2.8% ROE

It is hard to argue that Hercules Hoists' ROE is much good in and of itself. Even compared to the average industry ROE of 9.3%, the company's ROE is quite dismal. Therefore, the disappointing ROE therefore provides a background to Hercules Hoists' very little net income growth of 4.3% over the past five years.

Next, on comparing with the industry net income growth, we found that Hercules Hoists' reported growth was lower than the industry growth of 7.0% in the same period, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Hercules Hoists''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hercules Hoists Making Efficient Use Of Its Profits?

While Hercules Hoists has a decent three-year median payout ratio of 41% (or a retention ratio of 59%), it has seen very little growth in earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Hercules Hoists has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

Overall, we have mixed feelings about Hercules Hoists. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 4 risks we have identified for Hercules Hoists visit our risks dashboard for free.

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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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