Are Strong Financial Prospects The Force That Is Driving The Momentum In Voltamp Transformers Limited's NSE:VOLTAMP) Stock?

Most readers would already be aware that Voltamp Transformers' (NSE:VOLTAMP) stock increased significantly by 48% over the past three months. 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 Voltamp Transformers' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Voltamp Transformers

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 Voltamp Transformers is:

23% = ₹3.1b ÷ ₹14b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.23.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Voltamp Transformers' Earnings Growth And 23% ROE

At first glance, Voltamp Transformers seems to have a decent ROE. On comparing with the average industry ROE of 14% the company's ROE looks pretty remarkable. Probably as a result of this, Voltamp Transformers was able to see an impressive net income growth of 27% over the last five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Voltamp Transformers' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 25% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Voltamp Transformers is trading on a high P/E or a low P/E, relative to its industry.

Is Voltamp Transformers Using Its Retained Earnings Effectively?

Voltamp Transformers has a really low three-year median payout ratio of 25%, meaning that it has the remaining 75% left over to reinvest into its business. So it looks like Voltamp Transformers is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Voltamp Transformers has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 25%. As a result, Voltamp Transformers' ROE is not expected to change by much either, which we inferred from the analyst estimate of 21% for future ROE.

Summary

Overall, we are quite pleased with Voltamp Transformers' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.