Clean Science and Technology Limited (NSE:CLEAN) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?
Clean Science and Technology (NSE:CLEAN) has had a rough three months with its share price down 8.3%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Clean Science and Technology's ROE today.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Clean Science and Technology
How Do You 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 Clean Science and Technology is:
32% = ₹2.8b ÷ ₹8.7b (Based on the trailing twelve months to December 2022).
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 ₹0.32 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Clean Science and Technology's Earnings Growth And 32% ROE
First thing first, we like that Clean Science and Technology has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 15% also doesn't go unnoticed by us. As a result, Clean Science and Technology's exceptional 24% net income growth seen over the past five years, doesn't come as a surprise.
As a next step, we compared Clean Science and Technology's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 21% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Clean Science and Technology is trading on a high P/E or a low P/E, relative to its industry.
Is Clean Science and Technology Making Efficient Use Of Its Profits?
Clean Science and Technology's three-year median payout ratio to shareholders is 1.9%, which is quite low. This implies that the company is retaining 98% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.
Along with seeing a growth in earnings, Clean Science and Technology only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 13% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.
On the whole, we feel that Clean Science and Technology's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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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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.
Clean Science and Technology
Clean Science and Technology Limited engages in the research, development, manufacture, and marketing of specialty chemicals in India and internationally.
Excellent balance sheet with solid track record.