Could The Market Be Wrong About H.G. Infra Engineering Limited (NSE:HGINFRA) Given Its Attractive Financial Prospects?

H.G. Infra Engineering (NSE:HGINFRA) has had a rough three months with its share price down 15%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on H.G. Infra Engineering's ROE.

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

See our latest analysis for H.G. Infra Engineering

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for H.G. Infra Engineering is:

31% = ₹3.9b ÷ ₹12b (Based on the trailing twelve months to December 2021).

The 'return' is the income the business earned over the last year. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.31 in profit.

What Is The Relationship Between ROE And 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.

H.G. Infra Engineering's Earnings Growth And 31% ROE

To begin with, H.G. Infra Engineering has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 8.0% the company's ROE is quite impressive. As a result, H.G. Infra Engineering's exceptional 36% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that H.G. Infra Engineering's growth is quite high when compared to the industry average growth of 1.3% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about H.G. Infra Engineering's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is H.G. Infra Engineering Making Efficient Use Of Its Profits?

H.G. Infra Engineering has a really low three-year median payout ratio of 2.4%, meaning that it has the remaining 98% left over to reinvest into its business. So it looks like H.G. Infra Engineering is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, H.G. Infra Engineering is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.

Conclusion

Overall, we are quite pleased with H.G. Infra Engineering's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 1 risk we have identified for H.G. Infra Engineering by visiting our risks dashboard for free on our platform here.

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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.