Astron Paper & Board Mill Limited's (NSE:ASTRON) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Astron Paper & Board Mill's (NSE:ASTRON) stock is up by a considerable 10% 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. Specifically, we decided to study Astron Paper & Board Mill's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Astron Paper & Board Mill

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Astron Paper & Board Mill is:

3.4% = ₹55m ÷ ₹1.6b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.03 in profit.

What Has ROE Got To Do With 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. 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.

Astron Paper & Board Mill's Earnings Growth And 3.4% ROE

As you can see, Astron Paper & Board Mill's ROE looks pretty weak. Not just that, even compared to the industry average of 8.1%, the company's ROE is entirely unremarkable. Thus, the low net income growth of 2.1% seen by Astron Paper & Board Mill over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared Astron Paper & Board Mill's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 16% in the same period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Astron Paper & Board Mill fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Astron Paper & Board Mill Making Efficient Use Of Its Profits?

Summary

In total, we're a bit ambivalent about Astron Paper & Board Mill's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 2 risks we have identified for Astron Paper & Board Mill visit our risks dashboard for free.

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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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