Most readers would already be aware that Advanced Enzyme Technologies' (NSE:ADVENZYMES) stock increased significantly by 22% 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 Advanced Enzyme Technologies' ROE today.
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.
How Do You 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 Advanced Enzyme Technologies is:
16% = ₹1.5b ÷ ₹9.7b (Based on the trailing twelve months to December 2020).
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 ₹0.16.
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. 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.
Advanced Enzyme Technologies' Earnings Growth And 16% ROE
To start with, Advanced Enzyme Technologies' ROE looks acceptable. Especially when compared to the industry average of 13% the company's ROE looks pretty impressive. This probably laid the ground for Advanced Enzyme Technologies' moderate 13% net income growth seen over the past five years.
We then performed a comparison between Advanced Enzyme Technologies' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 14% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Advanced Enzyme Technologies''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Advanced Enzyme Technologies Making Efficient Use Of Its Profits?
Advanced Enzyme Technologies has a low three-year median payout ratio of 6.0%, meaning that the company retains the remaining 94% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Besides, Advanced Enzyme Technologies has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.
On the whole, we feel that Advanced Enzyme Technologies' performance has been quite good. 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 substantial growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain 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.
When trading Advanced Enzyme Technologies or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.