Stock Analysis

Is Deepak Nitrite Limited's (NSE:DEEPAKNTR) Latest Stock Performance A Reflection Of Its Financial Health?

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NSEI:DEEPAKNTR
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Most readers would already be aware that Deepak Nitrite's (NSE:DEEPAKNTR) stock increased significantly by 20% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Deepak Nitrite's ROE today.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Deepak Nitrite

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 Deepak Nitrite is:

30% = ₹10.0b ÷ ₹33b (Based on the trailing twelve months to June 2022).

The 'return' is the yearly profit. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.30 in profit.

What Is The Relationship Between ROE And 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. 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.

A Side By Side comparison of Deepak Nitrite's Earnings Growth And 30% ROE

To begin with, Deepak Nitrite has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 16% the company's ROE is quite impressive. So, the substantial 40% net income growth seen by Deepak Nitrite over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Deepak Nitrite's growth is quite high when compared to the industry average growth of 22% in the same period, which is great to see.

past-earnings-growth
NSEI:DEEPAKNTR Past Earnings Growth September 25th 2022

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Deepak Nitrite fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Deepak Nitrite Using Its Retained Earnings Effectively?

Deepak Nitrite's three-year median payout ratio to shareholders is 7.9%, which is quite low. This implies that the company is retaining 92% 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.

Additionally, Deepak Nitrite 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. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 9.5% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Summary

On the whole, we feel that Deepak Nitrite'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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Valuation is complex, but we're helping make it simple.

Find out whether Deepak Nitrite is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About NSEI:DEEPAKNTR

Deepak Nitrite

Deepak Nitrite Limited manufactures and sells basic chemicals, fine and speciality chemicals, performance products, and phenolics in India.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation1
Future Growth4
Past Performance3
Financial Health6
Dividends4

Read more about these checks in the individual report sections or in our analysis model.

Flawless balance sheet with reasonable growth potential and pays a dividend.