Is Jash Engineering Limited's (NSE:JASH) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Jash Engineering (NSE:JASH) has had a great run on the share market with its stock up by a significant 10% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Jash Engineering's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Jash Engineering

How To 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 Jash Engineering is:

11% = ₹141m ÷ ₹1.2b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.11.

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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Jash Engineering's Earnings Growth And 11% ROE

On the face of it, Jash Engineering's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 8.1% which we definitely can't overlook. Especially when you consider Jash Engineering's exceptional 22% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So, there might well be other reasons for the earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

As a next step, we compared Jash Engineering's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.5%.

Earnings growth is an important metric to consider when valuing a stock. 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 Jash Engineering's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jash Engineering Efficiently Re-investing Its Profits?

Jash Engineering's three-year median payout ratio to shareholders is 23%, which is quite low. This implies that the company is retaining 77% of its profits. So it looks like Jash Engineering is reinvesting profits heavily to grow its business, which shows in its earnings growth.

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

Summary

In total, we are pretty happy with Jash Engineering's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard would have the 3 risks we have identified for Jash Engineering.

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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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