Has Transformers and Rectifiers (India) Limited's (NSE:TARIL) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Transformers and Rectifiers (India) (NSE:TARIL) has had a great run on the share market with its stock up by a significant 31% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Transformers and Rectifiers (India)'s ROE.

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 Transformers and Rectifiers (India)

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Transformers and Rectifiers (India) is:

11% = ₹1.2b ÷ ₹11b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.11 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Transformers and Rectifiers (India)'s Earnings Growth And 11% ROE

At first glance, Transformers and Rectifiers (India)'s ROE doesn't look very promising. However, its ROE is similar to the industry average of 13%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that Transformers and Rectifiers (India)'s net income grew significantly at a rate of 59% over the last five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Transformers and Rectifiers (India)'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 33%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Transformers and Rectifiers (India)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Transformers and Rectifiers (India) Making Efficient Use Of Its Profits?

Transformers and Rectifiers (India)'s three-year median payout ratio to shareholders is 8.2%, which is quite low. This implies that the company is retaining 92% of its profits. So it looks like Transformers and Rectifiers (India) is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Transformers and Rectifiers (India) has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 10% over the next three years. Regardless, the future ROE for Transformers and Rectifiers (India) is speculated to rise to 24% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Conclusion

Overall, we feel that Transformers and Rectifiers (India) certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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

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.