Are Robust Financials Driving The Recent Rally In Dhanuka Agritech Limited's (NSE:DHANUKA) Stock?

By
Simply Wall St
Published
May 26, 2021
NSEI:DHANUKA
Source: Shutterstock

Most readers would already be aware that Dhanuka Agritech's (NSE:DHANUKA) stock increased significantly by 19% 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 Dhanuka Agritech's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Dhanuka Agritech

How Is ROE Calculated?

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 Dhanuka Agritech is:

26% = ₹2.1b ÷ ₹8.0b (Based on the trailing twelve months to March 2021).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.26 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of Dhanuka Agritech's Earnings Growth And 26% ROE

To begin with, Dhanuka Agritech seems to have a respectable ROE. Especially when compared to the industry average of 13% the company's ROE looks pretty impressive. This probably laid the ground for Dhanuka Agritech's moderate 11% net income growth seen over the past five years.

We then performed a comparison between Dhanuka Agritech's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 14% in the same period.

past-earnings-growth
NSEI:DHANUKA Past Earnings Growth May 27th 2021

Earnings growth is a huge factor in stock valuation. 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. Is Dhanuka Agritech fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Dhanuka Agritech Efficiently Re-investing Its Profits?

Dhanuka Agritech's three-year median payout ratio to shareholders is 8.9% (implying that it retains 91% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, Dhanuka Agritech has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 14% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Summary

In total, we are pretty happy with Dhanuka Agritech's performance. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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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