Insecticides (India) Limited (NSE:INSECTICID) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

By
Simply Wall St
Published
April 21, 2022
NSEI:INSECTICID
Source: Shutterstock

Most readers would already be aware that Insecticides (India)'s (NSE:INSECTICID) stock increased significantly by 15% over the past month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Insecticides (India)'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Insecticides (India)

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Insecticides (India) is:

13% = ₹1.1b ÷ ₹8.4b (Based on the trailing twelve months to December 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.13 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

Insecticides (India)'s Earnings Growth And 13% ROE

On the face of it, Insecticides (India)'s ROE is not much to talk about. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 16%. Thus, the low net income growth of 2.5% seen by Insecticides (India) over the past five years could probably be the result of the low ROE.

As a next step, we compared Insecticides (India)'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 21% in the same period.

past-earnings-growth
NSEI:INSECTICID Past Earnings Growth April 21st 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Insecticides (India) is trading on a high P/E or a low P/E, relative to its industry.

Is Insecticides (India) Using Its Retained Earnings Effectively?

A low three-year median payout ratio of 4.4% (implying that the company retains the remaining 96% of its income) suggests that Insecticides (India) is retaining most of its profits. 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.

In addition, Insecticides (India) 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.

Conclusion

Overall, we have mixed feelings about Insecticides (India). While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth.

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