Is Manaksia Aluminium Company Limited's (NSE:MANAKALUCO) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

By
Simply Wall St
Published
December 18, 2021
NSEI:MANAKALUCO
Source: Shutterstock

Most readers would already be aware that Manaksia Aluminium's (NSE:MANAKALUCO) stock increased significantly by 41% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Manaksia Aluminium's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Manaksia Aluminium

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 Manaksia Aluminium is:

7.2% = ₹80m ÷ ₹1.1b (Based on the trailing twelve months to September 2021).

The 'return' is the yearly profit. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.07 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Manaksia Aluminium's Earnings Growth And 7.2% ROE

As you can see, Manaksia Aluminium's ROE looks pretty weak. Even when compared to the industry average of 15%, the ROE figure is pretty disappointing. In spite of this, Manaksia Aluminium was able to grow its net income considerably, at a rate of 31% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Manaksia Aluminium's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 15%.

past-earnings-growth
NSEI:MANAKALUCO Past Earnings Growth December 18th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Manaksia Aluminium's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Manaksia Aluminium Using Its Retained Earnings Effectively?

Manaksia Aluminium doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

On the whole, we do feel that Manaksia Aluminium has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 3 risks we have identified for Manaksia Aluminium by visiting our risks dashboard for free on our platform here.

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