Indraprastha Medical Corporation Limited's (NSE:INDRAMEDCO) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Indraprastha Medical's (NSE:INDRAMEDCO) stock increased significantly by 11% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Indraprastha Medical's 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Indraprastha Medical is:

29% = ₹1.5b ÷ ₹5.2b (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.29 in profit.

View our latest analysis for Indraprastha Medical

What Is The Relationship Between ROE And Earnings Growth?

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

A Side By Side comparison of Indraprastha Medical's Earnings Growth And 29% ROE

To begin with, Indraprastha Medical has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 12% the company's ROE is quite impressive. As a result, Indraprastha Medical's exceptional 40% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Indraprastha Medical'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 23%.

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. If you're wondering about Indraprastha Medical's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Indraprastha Medical Efficiently Re-investing Its Profits?

The three-year median payout ratio for Indraprastha Medical is 33%, which is moderately low. The company is retaining the remaining 67%. By the looks of it, the dividend is well covered and Indraprastha Medical is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Indraprastha Medical 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 Indraprastha Medical's 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.