Mangalam Cement Limited's (NSE:MANGLMCEM) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that Mangalam Cement's (NSE:MANGLMCEM) stock increased significantly by 75% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Mangalam Cement's 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out 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:

7.5% = ₹581m ÷ ₹7.8b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.07 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. 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.

A Side By Side comparison of Mangalam Cement's Earnings Growth And 7.5% ROE

As you can see, Mangalam Cement's ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 7.9% either. Therefore, the low net income growth of 3.5% seen by Mangalam Cement over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared Mangalam Cement's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 3.5% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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 Mangalam Cement's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Mangalam Cement Making Efficient Use Of Its Profits?

Mangalam Cement has a low three-year median payout ratio of 4.9% (meaning, the company keeps the remaining 95% of profits) which means that the company is retaining more of its earnings. However, the low earnings growth number doesn't reflect this as high growth usually follows high profit retention. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Moreover, Mangalam Cement has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 2.0% over the next three years. As a result, the expected drop in Mangalam Cement's payout ratio explains the anticipated rise in the company's future ROE to 19%, over the same period.

Conclusion

On the whole, we do feel that Mangalam Cement has some positive attributes. That is, a decent growth in earnings backed by a high rate of reinvestment. However, we do feel that that earnings growth could have been higher if the business were to improve on the low ROE rate. Especially given how the company is reinvesting a huge chunk of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.