Hindprakash Industries Limited's (NSE:HPIL) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Hindprakash Industries' (NSE:HPIL) stock up by 2.1% over the past week. However, the company's financials look a bit inconsistent and market outcomes are ultimately driven by long-term fundamentals, meaning that the stock could head in either direction. Specifically, we decided to study Hindprakash Industries' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Hindprakash Industries

How To Calculate Return On Equity?

ROE 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 Hindprakash Industries is:

5.5% = ₹19m ÷ ₹344m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.06 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Hindprakash Industries' Earnings Growth And 5.5% ROE

It is hard to argue that Hindprakash Industries' ROE is much good in and of itself. Even when compared to the industry average of 12%, the ROE figure is pretty disappointing. Thus, the low net income growth of 4.2% seen by Hindprakash Industries over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Hindprakash Industries' reported growth was lower than the industry growth of 15% in the same period, which is not something we like to see.

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. If you're wondering about Hindprakash Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hindprakash Industries Efficiently Re-investing Its Profits?

Hindprakash Industries has a low three-year median payout ratio of 0.5% (meaning, the company keeps the remaining 100% of profits) which means that the company is retaining more of its earnings. However, the low earnings growth number doesn't reflect this fact. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Additionally, Hindprakash Industries started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth.

Conclusion

In total, we're a bit ambivalent about Hindprakash Industries' performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 5 risks we have identified for Hindprakash Industries visit our risks dashboard for free.

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This article by Simply Wall St is general in nature. 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.
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