Can Honda India Power Products Limited (NSE:HONDAPOWER) Performance Keep Up Given Its Mixed Bag Of Fundamentals?

Honda India Power Products' (NSE:HONDAPOWER) stock up by 9.6% over the past three months. However, the company's financials look a bit inconsistent and market outcomes are ultimately driven by long-term fundamentals, meaning that the stock could head in either direction. Specifically, we decided to study Honda India Power Products' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Honda India Power Products

How Do You Calculate Return On Equity?

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 Honda India Power Products is:

6.7% = ₹382m ÷ ₹5.7b (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.07.

Why Is ROE Important For 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.

Honda India Power Products' Earnings Growth And 6.7% ROE

It is hard to argue that Honda India Power Products' ROE is much good in and of itself. Even when compared to the industry average of 9.0%, the ROE figure is pretty disappointing. As a result, Honda India Power Products' flat earnings over the past five years doesn't come as a surprise given its lower ROE.

As a next step, we compared Honda India Power Products' net income growth with the industry and discovered that the industry saw an average growth of 7.7% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for HONDAPOWER? You can find out in our latest intrinsic value infographic research report

Is Honda India Power Products Using Its Retained Earnings Effectively?

Honda India Power Products' low three-year median payout ratio of 19%, (meaning the company retains81% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

Additionally, Honda India Power Products has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

In total, we're a bit ambivalent about Honda India Power Products' performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Up till now, we've only made a short study of the company's growth data. To gain further insights into Honda India Power Products' past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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