Are Mahamaya Steel Industries Limited's (NSE:MAHASTEEL) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

By
Simply Wall St
Published
May 12, 2022
NSEI:MAHASTEEL
Source: Shutterstock

With its stock down 20% over the past month, it is easy to disregard Mahamaya Steel Industries (NSE:MAHASTEEL). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to Mahamaya Steel Industries' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Mahamaya Steel Industries

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 Mahamaya Steel Industries is:

4.7% = ₹52m ÷ ₹1.1b (Based on the trailing twelve months to December 2021).

The 'return' refers to a company's earnings over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.05.

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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Mahamaya Steel Industries' Earnings Growth And 4.7% ROE

As you can see, Mahamaya Steel Industries' ROE looks pretty weak. Even when compared to the industry average of 16%, the ROE figure is pretty disappointing. Hence, the flat earnings seen by Mahamaya Steel Industries over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared Mahamaya Steel Industries' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 19% in the same period.

past-earnings-growth
NSEI:MAHASTEEL Past Earnings Growth May 12th 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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Mahamaya Steel Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Mahamaya Steel Industries Using Its Retained Earnings Effectively?

Mahamaya Steel Industries doesn't pay any dividend, which means that it is retaining all of its earnings. This makes us question why the company is retaining so much of its profits and still generating almost no growth? It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Conclusion

On the whole, we feel that the performance shown by Mahamaya Steel Industries can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Mahamaya Steel Industries' past profit growth, check out this visualization of past earnings, revenue and cash flows.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.