Is Mahindra EPC Irrigation Limited's(NSE:MAHEPC) Recent Stock Performance Tethered To Its Strong Fundamentals?

Mahindra EPC Irrigation's (NSE:MAHEPC) stock is up by a considerable 9.5% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Mahindra EPC Irrigation's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Mahindra EPC Irrigation

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 Mahindra EPC Irrigation is:

14% = ₹244m ÷ ₹1.7b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.14.

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. 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.

Mahindra EPC Irrigation's Earnings Growth And 14% ROE

When you first look at it, Mahindra EPC Irrigation's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 8.1% doesn't go unnoticed by us. Even more so after seeing Mahindra EPC Irrigation's exceptional 28% 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. Hence, there might be some other aspects that are causing earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing with the industry net income growth, we found that Mahindra EPC Irrigation's growth is quite high when compared to the industry average growth of 7.5% 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Mahindra EPC Irrigation is trading on a high P/E or a low P/E, relative to its industry.

Is Mahindra EPC Irrigation Efficiently Re-investing Its Profits?

Mahindra EPC Irrigation's ' three-year median payout ratio is on the lower side at 18% implying that it is retaining a higher percentage (82%) of its profits. So it looks like Mahindra EPC Irrigation is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Mahindra EPC Irrigation has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we are quite pleased with Mahindra EPC Irrigation's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. 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. To know the 3 risks we have identified for Mahindra EPC Irrigation visit our risks dashboard for free.

When trading Mahindra EPC Irrigation or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.