Is Weakness In Century Plyboards (India) Limited (NSE:CENTURYPLY) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

By
Simply Wall St
Published
May 09, 2022
NSEI:CENTURYPLY
Source: Shutterstock

With its stock down 13% over the past month, it is easy to disregard Century Plyboards (India) (NSE:CENTURYPLY). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Century Plyboards (India)'s ROE.

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.

See our latest analysis for Century Plyboards (India)

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Century Plyboards (India) is:

23% = ₹3.1b ÷ ₹14b (Based on the trailing twelve months to December 2021).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.23.

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.

A Side By Side comparison of Century Plyboards (India)'s Earnings Growth And 23% ROE

To start with, Century Plyboards (India)'s ROE looks acceptable. Especially when compared to the industry average of 11% the company's ROE looks pretty impressive. Probably as a result of this, Century Plyboards (India) was able to see a decent growth of 10% over the last five years.

Next, on comparing with the industry net income growth, we found that Century Plyboards (India)'s growth is quite high when compared to the industry average growth of 6.0% in the same period, which is great to see.

past-earnings-growth
NSEI:CENTURYPLY Past Earnings Growth May 9th 2022

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. 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 Century Plyboards (India)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Century Plyboards (India) Using Its Retained Earnings Effectively?

Century Plyboards (India) has a low three-year median payout ratio of 13%, meaning that the company retains the remaining 87% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Moreover, Century Plyboards (India) is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 7.3% over the next three years. However, the company's ROE is not expected to change by much despite the lower expected payout ratio.

Conclusion

On the whole, we feel that Century Plyboards (India)'s performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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