Is Mold-Tek Packaging Limited's(NSE:MOLDTKPAC) Recent Stock Performance Tethered To Its Strong Fundamentals?

Mold-Tek Packaging (NSE:MOLDTKPAC) has had a great run on the share market with its stock up by a significant 42% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Mold-Tek Packaging's ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Mold-Tek Packaging

How To Calculate Return On Equity?

ROE 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 Mold-Tek Packaging is:

18% = ₹387m ÷ ₹2.1b (Based on the trailing twelve months to December 2020).

The 'return' refers to a company's earnings over the last year. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.18 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.

A Side By Side comparison of Mold-Tek Packaging's Earnings Growth And 18% ROE

At first glance, Mold-Tek Packaging seems to have a decent ROE. Especially when compared to the industry average of 10% the company's ROE looks pretty impressive. Probably as a result of this, Mold-Tek Packaging was able to see a decent growth of 9.9% over the last five years.

We then performed a comparison between Mold-Tek Packaging's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 10% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Mold-Tek Packaging is trading on a high P/E or a low P/E, relative to its industry.

Is Mold-Tek Packaging Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 37% (implying that the company retains 63% of its profits), it seems that Mold-Tek Packaging is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, Mold-Tek Packaging has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 23% over the next three years. However, the company's ROE is not expected to change by much despite the lower expected payout ratio.

Summary

In total, we are pretty happy with Mold-Tek Packaging's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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. 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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