Is Suyog Telematics Limited's (NSE:SUYOG) Latest Stock Performance A Reflection Of Its Financial Health?

Most readers would already be aware that Suyog Telematics' (NSE:SUYOG) stock increased significantly by 16% over the past week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Suyog Telematics' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Suyog Telematics

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Suyog Telematics is:

23% = ₹680m ÷ ₹3.0b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.23 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Suyog Telematics' Earnings Growth And 23% ROE

To start with, Suyog Telematics' ROE looks acceptable. On comparing with the average industry ROE of 13% the company's ROE looks pretty remarkable. Probably as a result of this, Suyog Telematics was able to see a decent growth of 17% over the last five years.

Next, on comparing with the industry net income growth, we found that Suyog Telematics' reported growth was lower than the industry growth of 27% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Suyog Telematics''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Suyog Telematics Using Its Retained Earnings Effectively?

In Suyog Telematics' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 1.1% (or a retention ratio of 99%), which suggests that the company is investing most of its profits to grow its business.

Additionally, Suyog Telematics has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we are quite pleased with Suyog Telematics' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 2 risks we have identified for Suyog Telematics by visiting our risks dashboard for free on our platform here.

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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.