Has Anjani Portland Cement Limited's (NSE:APCL) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Most readers would already be aware that Anjani Portland Cement's (NSE:APCL) stock increased significantly by 45% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Anjani Portland Cement's ROE in this article.

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.

See our latest analysis for Anjani Portland Cement

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 Anjani Portland Cement is:

16% = ₹429m ÷ ₹2.7b (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.16 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of Anjani Portland Cement's Earnings Growth And 16% ROE

To begin with, Anjani Portland Cement seems to have a respectable ROE. Especially when compared to the industry average of 9.1% the company's ROE looks pretty impressive. Given the circumstances, we can't help but wonder why Anjani Portland Cement saw little to no growth in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. These include low earnings retention or poor allocation of capital.

We then compared Anjani Portland Cement's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 10.0% in the same period, which is a bit concerning.

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. 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 Anjani Portland Cement's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Anjani Portland Cement Making Efficient Use Of Its Profits?

Anjani Portland Cement has a low three-year median payout ratio of 16% (or a retention ratio of 84%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

In addition, Anjani Portland Cement has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

In total, it does look like Anjani Portland Cement has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Anjani Portland Cement's 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. 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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