Sanghi Industries Limited (NSE:SANGHIIND) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

By
Simply Wall St
Published
June 07, 2021
NSEI:SANGHIIND
Source: Shutterstock

Sanghi Industries (NSE:SANGHIIND) has had a great run on the share market with its stock up by a significant 28% over the last 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 Sanghi Industries' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Sanghi Industries

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 Sanghi Industries is:

3.9% = ₹680m ÷ ₹17b (Based on the trailing twelve months to December 2020).

The 'return' is the profit 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 ₹0.04 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.

Sanghi Industries' Earnings Growth And 3.9% ROE

It is hard to argue that Sanghi Industries' ROE is much good in and of itself. Even compared to the average industry ROE of 12%, the company's ROE is quite dismal. Therefore, Sanghi Industries' flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by16% in the same period.

past-earnings-growth
NSEI:SANGHIIND Past Earnings Growth June 8th 2021

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Sanghi Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Sanghi Industries Using Its Retained Earnings Effectively?

Summary

Overall, we have mixed feelings about Sanghi Industries. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Sanghi Industries and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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