Alkali Metals Limited (NSE:ALKALI) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Alkali Metals' (NSE:ALKALI) stock is up by a considerable 36% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Alkali Metals' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Alkali Metals

How Do You 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 Alkali Metals is:

2.8% = ₹14m ÷ ₹508m (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.03 in profit.

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 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.

Alkali Metals' Earnings Growth And 2.8% ROE

It is quite clear that Alkali Metals' ROE is rather low. Not just that, even compared to the industry average of 11%, the company's ROE is entirely unremarkable. Alkali Metals was still able to see a decent net income growth of 8.3% over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Alkali Metals' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 17% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Alkali Metals is trading on a high P/E or a low P/E, relative to its industry.

Is Alkali Metals Making Efficient Use Of Its Profits?

The high LTM (or last twelve month) payout ratio of 70% (or a retention ratio of 30%) for Alkali Metals suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Alkali Metals has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we feel that the performance shown by Alkali Metals can be open to many interpretations. While the company has posted a decent earnings growth, We do feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings at a higher rate of return. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Alkali Metals' past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.