Is Agarwal Industrial Corporation Limited's (NSE:AGARIND) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

By
Simply Wall St
Published
February 23, 2022
NSEI:AGARIND
Source: Shutterstock

Agarwal Industrial's (NSE:AGARIND) stock is up by a considerable 15% 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 Agarwal Industrial's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Agarwal Industrial

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 Agarwal Industrial is:

26% = ₹637m ÷ ₹2.4b (Based on the trailing twelve months to December 2021).

The 'return' refers to a company's earnings over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.26.

Why Is ROE Important For 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. 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.

Agarwal Industrial's Earnings Growth And 26% ROE

To begin with, Agarwal Industrial seems to have a respectable ROE. On comparing with the average industry ROE of 17% the company's ROE looks pretty remarkable. This certainly adds some context to Agarwal Industrial's exceptional 42% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Agarwal Industrial's growth is quite high when compared to the industry average growth of 20% in the same period, which is great to see.

past-earnings-growth
NSEI:AGARIND Past Earnings Growth February 23rd 2022

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Agarwal Industrial is trading on a high P/E or a low P/E, relative to its industry.

Is Agarwal Industrial Using Its Retained Earnings Effectively?

Agarwal Industrial's ' three-year median payout ratio is on the lower side at 6.0% implying that it is retaining a higher percentage (94%) of its profits. So it looks like Agarwal Industrial is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Agarwal Industrial has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we are quite pleased with Agarwal Industrial'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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 5 risks we have identified for Agarwal Industrial visit our risks dashboard for free.

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