Are Strong Financial Prospects The Force That Is Driving The Momentum In Advanced Enzyme Technologies Limited's NSE:ADVENZYMES) Stock?

Most readers would already be aware that Advanced Enzyme Technologies' (NSE:ADVENZYMES) stock increased significantly by 43% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Advanced Enzyme Technologies' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Advanced Enzyme Technologies

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 Advanced Enzyme Technologies is:

15% = ₹1.4b ÷ ₹9.3b (Based on the trailing twelve months to September 2020).

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 ₹0.15 in profit.

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. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Advanced Enzyme Technologies' Earnings Growth And 15% ROE

At first glance, Advanced Enzyme Technologies' ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 11% doesn't go unnoticed by us. This probably goes some way in explaining Advanced Enzyme Technologies' moderate 12% growth over the past five years amongst other factors. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

Next, on comparing Advanced Enzyme Technologies' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 15% 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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Advanced Enzyme Technologies is trading on a high P/E or a low P/E, relative to its industry.

Is Advanced Enzyme Technologies Efficiently Re-investing Its Profits?

In Advanced Enzyme Technologies' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 6.0% (or a retention ratio of 94%), which suggests that the company is investing most of its profits to grow its business.

Moreover, Advanced Enzyme Technologies is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Conclusion

On the whole, we feel that Advanced Enzyme Technologies' performance has been quite good. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.
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