Isgec Heavy Engineering Limited (NSE:ISGEC) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Isgec Heavy Engineering's (NSE:ISGEC) stock is up by a considerable 11% over the past week. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Isgec Heavy Engineering's ROE.

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.

View our latest analysis for Isgec Heavy Engineering

How To Calculate Return On Equity?

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 Isgec Heavy Engineering is:

6.8% = ₹1.5b ÷ ₹22b (Based on the trailing twelve months to December 2022).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.07 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.

A Side By Side comparison of Isgec Heavy Engineering's Earnings Growth And 6.8% ROE

It is hard to argue that Isgec Heavy Engineering's ROE is much good in and of itself. Even when compared to the industry average of 14%, the ROE figure is pretty disappointing. Hence, the flat earnings seen by Isgec Heavy Engineering over the past five years could probably be the result of it having a lower ROE.

We then compared Isgec Heavy Engineering's net income growth with the industry and found that the average industry growth rate was 17% in the same period.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Isgec Heavy Engineering's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Isgec Heavy Engineering Making Efficient Use Of Its Profits?

Isgec Heavy Engineering's low three-year median payout ratio of 7.7% (implying that the company keeps92% of its income) should mean that the company is retaining most of its earnings to fuel its growth and this should be reflected in its growth number, but that's not the case.

In addition, Isgec Heavy Engineering 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.

Conclusion

In total, we're a bit ambivalent about Isgec Heavy Engineering's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Isgec Heavy Engineering's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.