Is Macpower CNC Machines Limited's (NSE:MACPOWER) Latest Stock Performance A Reflection Of Its Financial Health?

Macpower CNC Machines (NSE:MACPOWER) has had a great run on the share market with its stock up by a significant 38% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Macpower CNC Machines' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Macpower CNC Machines

How Is ROE Calculated?

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 Macpower CNC Machines is:

19% = ₹182m ÷ ₹966m (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.19 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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 Macpower CNC Machines' Earnings Growth And 19% ROE

To begin with, Macpower CNC Machines seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 17%. Consequently, this likely laid the ground for the decent growth of 15% seen over the past five years by Macpower CNC Machines.

Next, on comparing with the industry net income growth, we found that Macpower CNC Machines' reported growth was lower than the industry growth of 22% over the last few years, 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. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Macpower CNC Machines''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Macpower CNC Machines Making Efficient Use Of Its Profits?

Macpower CNC Machines' three-year median payout ratio to shareholders is 9.5% (implying that it retains 90% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, Macpower CNC Machines has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we are quite pleased with Macpower CNC Machines' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings.

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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.