Mold-Tek Packaging Limited's (NSE:MOLDTKPAC) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at Mold-Tek Packaging's (NSE:MOLDTKPAC) recent performance, when its stock has declined 35% over the past three months. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Mold-Tek Packaging's 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.

Check out our latest analysis for Mold-Tek Packaging

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Mold-Tek Packaging is:

10.0% = ₹623m ÷ ₹6.2b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.10 in profit.

What Is The Relationship Between ROE And 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 Mold-Tek Packaging's Earnings Growth And 10.0% ROE

At first glance, Mold-Tek Packaging's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 10%, we may spare it some thought. Having said that, Mold-Tek Packaging has shown a modest net income growth of 13% over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Mold-Tek Packaging'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 15% in the same period.

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. If you're wondering about Mold-Tek Packaging's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Mold-Tek Packaging Using Its Retained Earnings Effectively?

Mold-Tek Packaging has a low three-year median payout ratio of 25%, meaning that the company retains the remaining 75% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 22%. Still, forecasts suggest that Mold-Tek Packaging's future ROE will rise to 13% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we do feel that Mold-Tek Packaging 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.