Declining Stock and Solid Fundamentals: Is The Market Wrong About Prakash Pipes Limited (NSE:PPL)?

With its stock down 13% over the past month, it is easy to disregard Prakash Pipes (NSE:PPL). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Prakash Pipes' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Prakash Pipes

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 Prakash Pipes is:

26% = ₹966m ÷ ₹3.7b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.26 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 Prakash Pipes' Earnings Growth And 26% ROE

To begin with, Prakash Pipes seems to have a respectable ROE. Especially when compared to the industry average of 13% the company's ROE looks pretty impressive. This certainly adds some context to Prakash Pipes' exceptional 28% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Prakash Pipes' growth is quite high when compared to the industry average growth of 23% 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. Doing so will help them establish if the stock's future looks promising or ominous. Is Prakash Pipes fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Prakash Pipes Making Efficient Use Of Its Profits?

Prakash Pipes has a really low three-year median payout ratio of 4.8%, meaning that it has the remaining 95% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Moreover, Prakash Pipes is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend.

Summary

In total, we are pretty happy with Prakash Pipes' 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 substantial 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.