Aeroflex Enterprises Limited's (NSE:AEROENTER) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that Aeroflex Enterprises' (NSE:AEROENTER) stock increased significantly by 24% over the past three months. 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. Particularly, we will be paying attention to Aeroflex Enterprises' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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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 Aeroflex Enterprises is:

9.8% = ₹807m ÷ ₹8.2b (Based on the trailing twelve months to March 2025).

The 'return' is the yearly profit. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.10.

View our latest analysis for Aeroflex Enterprises

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Aeroflex Enterprises' Earnings Growth And 9.8% ROE

On the face of it, Aeroflex Enterprises' ROE is not much to talk about. However, its ROE is similar to the industry average of 11%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that Aeroflex Enterprises' net income grew significantly at a rate of 48% over the last five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Aeroflex Enterprises' growth is quite high when compared to the industry average growth of 26% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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 Aeroflex Enterprises is trading on a high P/E or a low P/E, relative to its industry.

Is Aeroflex Enterprises Efficiently Re-investing Its Profits?

Aeroflex Enterprises' three-year median payout ratio to shareholders is 3.2%, which is quite low. This implies that the company is retaining 97% of its profits. So it looks like Aeroflex Enterprises is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Aeroflex Enterprises has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we do feel that Aeroflex Enterprises has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for Aeroflex Enterprises.

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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.