Are Strong Financial Prospects The Force That Is Driving The Momentum In APL Apollo Tubes Limited's NSE:APLAPOLLO) Stock?

APL Apollo Tubes' (NSE:APLAPOLLO) stock is up by a considerable 14% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study APL Apollo Tubes' 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.

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How Is ROE Calculated?

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 APL Apollo Tubes is:

16% = ₹6.3b ÷ ₹38b (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.16 in profit.

Check out our latest analysis for APL Apollo Tubes

Why Is ROE Important For Earnings Growth?

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

APL Apollo Tubes' Earnings Growth And 16% ROE

To begin with, APL Apollo Tubes seems to have a respectable ROE. Especially when compared to the industry average of 11% the company's ROE looks pretty impressive. Probably as a result of this, APL Apollo Tubes was able to see an impressive net income growth of 21% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then compared APL Apollo Tubes' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 27% in the same 5-year period, which is a bit concerning.

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. Is APL Apollo Tubes fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is APL Apollo Tubes Using Its Retained Earnings Effectively?

APL Apollo Tubes has a really low three-year median payout ratio of 21%, meaning that it has the remaining 79% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Additionally, APL Apollo Tubes 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. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 30% over the next three years. Regardless, the future ROE for APL Apollo Tubes is speculated to rise to 25% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Conclusion

In total, we are pretty happy with APL Apollo Tubes' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.