Maharashtra Seamless Limited (NSE:MAHSEAMLES) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

By
Simply Wall St
Published
March 15, 2022
NSEI:MAHSEAMLES
Source: Shutterstock

Maharashtra Seamless (NSE:MAHSEAMLES) has had a great run on the share market with its stock up by a significant 12% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Maharashtra Seamless' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Maharashtra Seamless

How To Calculate Return On Equity?

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 Maharashtra Seamless is:

6.8% = ₹2.4b ÷ ₹35b (Based on the trailing twelve months to December 2021).

The 'return' is the amount earned after tax over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.07 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. 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. 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.

Maharashtra Seamless' Earnings Growth And 6.8% ROE

It is hard to argue that Maharashtra Seamless' ROE is much good in and of itself. Not just that, even compared to the industry average of 15%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 11% seen by Maharashtra Seamless over the last five years is not surprising. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

So, as a next step, we compared Maharashtra Seamless' performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 19% in the same period.

past-earnings-growth
NSEI:MAHSEAMLES Past Earnings Growth March 15th 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. Is Maharashtra Seamless fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Maharashtra Seamless Efficiently Re-investing Its Profits?

Maharashtra Seamless' low three-year median payout ratio of 20% (implying that it retains the remaining 80% of its profits) comes as a surprise when you pair it with the shrinking earnings. The low payout should mean that the company is retaining most of its earnings and consequently, should see some growth. So there might be other factors at play here which could potentially be hampering growth. For instance, the business has faced some headwinds.

In addition, Maharashtra Seamless 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.

Summary

In total, we're a bit ambivalent about Maharashtra Seamless' performance. 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. 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. You can see the 3 risks we have identified for Maharashtra Seamless by visiting our risks dashboard for free on our platform here.

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.