Deepak Nitrite Limited's (NSE:DEEPAKNTR) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Deepak Nitrite (NSE:DEEPAKNTR) has had a rough three months with its share price down 12%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Deepak Nitrite's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Deepak Nitrite is:

15% = ₹7.5b ÷ ₹51b (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.15 in profit.

Check out our latest analysis for Deepak Nitrite

What Is The Relationship Between ROE And 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Deepak Nitrite's Earnings Growth And 15% ROE

On the face of it, Deepak Nitrite's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 10%, is definitely interesting. Still, Deepak Nitrite's net income growth of 4.4% over the past five years was mediocre at best. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the low earnings growth.

As a next step, we compared Deepak Nitrite'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 13% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. 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 Deepak Nitrite is trading on a high P/E or a low P/E, relative to its industry.

Is Deepak Nitrite Efficiently Re-investing Its Profits?

Deepak Nitrite has a low three-year median payout ratio of 12% (meaning, the company keeps the remaining 88% of profits) which means that the company is retaining more of its earnings. This should be reflected in its earnings growth number, but that's not the case. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Deepak Nitrite 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 17% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Conclusion

Overall, we feel that Deepak Nitrite certainly does have some positive factors to consider. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that's hampering growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.