Could The Market Be Wrong About Lloyds Metals and Energy Limited (NSE:LLOYDSME) Given Its Attractive Financial Prospects?

With its stock down 21% over the past month, it is easy to disregard Lloyds Metals and Energy (NSE:LLOYDSME). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Lloyds Metals and Energy's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Lloyds Metals and Energy

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Lloyds Metals and Energy is:

26% = ₹15b ÷ ₹58b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.26 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Lloyds Metals and Energy's Earnings Growth And 26% ROE

To begin with, Lloyds Metals and Energy seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 11%. This certainly adds some context to Lloyds Metals and Energy's exceptional 59% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Lloyds Metals and Energy's growth is quite high when compared to the industry average growth of 27% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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. What is LLOYDSME worth today? The intrinsic value infographic in our free research report helps visualize whether LLOYDSME is currently mispriced by the market.

Is Lloyds Metals and Energy Making Efficient Use Of Its Profits?

Lloyds Metals and Energy's ' three-year median payout ratio is on the lower side at 11% implying that it is retaining a higher percentage (89%) of its profits. So it looks like Lloyds Metals and Energy is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Lloyds Metals and Energy is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 2.2% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 38%, over the same period.

Summary

Overall, we are quite pleased with Lloyds Metals and Energy's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.