Has Mangalam Cement Limited's (NSE:MANGLMCEM) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Most readers would already be aware that Mangalam Cement's (NSE:MANGLMCEM) stock increased significantly by 18% over the past three months. 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. Particularly, we will be paying attention to Mangalam Cement'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 Mangalam Cement

How Do You 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 Mangalam Cement is:

10% = ₹631m ÷ ₹6.1b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.10 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Mangalam Cement's Earnings Growth And 10% ROE

At first glance, Mangalam Cement's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 9.3%, we may spare it some thought. Particularly, the exceptional 37% net income growth seen by Mangalam Cement over the past five years is pretty remarkable. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Mangalam Cement'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 8.0%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Mangalam Cement's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Mangalam Cement Efficiently Re-investing Its Profits?

Mangalam Cement's ' three-year median payout ratio is on the lower side at 3.5% implying that it is retaining a higher percentage (96%) of its profits. So it looks like Mangalam Cement is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Mangalam Cement has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we feel that Mangalam Cement certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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 2 risks we have identified for Mangalam Cement by visiting our risks dashboard for free on our platform here.

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This article by Simply Wall St is general in nature. 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.
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