Ion Exchange (India) Limited's (NSE:IONEXCHANG) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Ion Exchange (India)'s (NSE:IONEXCHANG) stock is up by a considerable 13% 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 Ion Exchange (India)'s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

We check all companies for important risks. See what we found for Ion Exchange (India) in our free report.

How Is ROE Calculated?

ROE 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 Ion Exchange (India) is:

20% = ₹2.2b ÷ ₹11b (Based on the trailing twelve months to December 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.20 in profit.

View our latest analysis for Ion Exchange (India)

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. 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. 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.

Ion Exchange (India)'s Earnings Growth And 20% ROE

To begin with, Ion Exchange (India) seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 14%. This probably laid the ground for Ion Exchange (India)'s moderate 17% net income growth seen over the past five years.

As a next step, we compared Ion Exchange (India)'s net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 34% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Ion Exchange (India) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Ion Exchange (India) Efficiently Re-investing Its Profits?

Ion Exchange (India)'s three-year median payout ratio to shareholders is 7.5% (implying that it retains 92% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Ion Exchange (India) is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

Overall, we are quite pleased with Ion Exchange (India)'s 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 a good amount of 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.