Sagardeep Alloys Limited's (NSE:SAGARDEEP) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

By
Simply Wall St
Published
June 19, 2021
NSEI:SAGARDEEP
Source: Shutterstock

Most readers would already be aware that Sagardeep Alloys' (NSE:SAGARDEEP) stock increased significantly by 50% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Sagardeep Alloys' ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Sagardeep Alloys

How To 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 Sagardeep Alloys is:

0.6% = ₹1.4m ÷ ₹258m (Based on the trailing twelve months to March 2021).

The 'return' is the profit over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.01 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Sagardeep Alloys' Earnings Growth And 0.6% ROE

It is quite clear that Sagardeep Alloys' ROE is rather low. Not just that, even compared to the industry average of 9.6%, the company's ROE is entirely unremarkable. Therefore, it might not be wrong to say that the five year net income decline of 27% seen by Sagardeep Alloys was possibly a result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

That being said, we compared Sagardeep Alloys' performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 13% in the same period.

past-earnings-growth
NSEI:SAGARDEEP Past Earnings Growth June 20th 2021

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. Is Sagardeep Alloys fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sagardeep Alloys Using Its Retained Earnings Effectively?

Summary

In total, we're a bit ambivalent about Sagardeep Alloys' performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 5 risks we have identified for Sagardeep Alloys 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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