Triveni Engineering & Industries Limited's (NSE:TRIVENI) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Triveni Engineering & Industries (NSE:TRIVENI) has had a great run on the share market with its stock up by a significant 21% over the last month. 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. Specifically, we decided to study Triveni Engineering & Industries' ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Triveni Engineering & Industries

How Do You Calculate Return On Equity?

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 Triveni Engineering & Industries is:

11% = ₹3.1b ÷ ₹28b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.11.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Triveni Engineering & Industries' Earnings Growth And 11% ROE

On the face of it, Triveni Engineering & Industries' ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 10%. Having said that, Triveni Engineering & Industries has shown a modest net income growth of 19% over the past five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Triveni Engineering & Industries' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 17% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Triveni Engineering & Industries is trading on a high P/E or a low P/E, relative to its industry.

Is Triveni Engineering & Industries Making Efficient Use Of Its Profits?

Triveni Engineering & Industries has a low three-year median payout ratio of 4.4%, meaning that the company retains the remaining 96% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, Triveni Engineering & Industries has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 15% over the next three years. Regardless, the future ROE for Triveni Engineering & Industries is speculated to rise to 15% 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

On the whole, we do feel that Triveni Engineering & Industries has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.