Are Robust Financials Driving The Recent Rally In Tilaknagar Industries Ltd.'s (NSE:TI) Stock?

Most readers would already be aware that Tilaknagar Industries' (NSE:TI) stock increased significantly by 12% 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 Tilaknagar Industries' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Tilaknagar Industries

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 Tilaknagar Industries is:

29% = ₹1.7b ÷ ₹5.7b (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.29 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Tilaknagar Industries' Earnings Growth And 29% ROE

First thing first, we like that Tilaknagar Industries has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 15% also doesn't go unnoticed by us. As a result, Tilaknagar Industries' exceptional 34% net income growth seen over the past five years, doesn't come as a surprise.

We then performed a comparison between Tilaknagar Industries' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 30% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Tilaknagar Industries fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tilaknagar Industries Making Efficient Use Of Its Profits?

Tilaknagar Industries' three-year median payout ratio to shareholders is 3.0%, which is quite low. This implies that the company is retaining 97% of its profits. So it looks like Tilaknagar Industries is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Tilaknagar Industries has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Tilaknagar Industries' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 2 risks we have identified for Tilaknagar Industries visit our risks dashboard for free.

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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.