Shivalik Bimetal Controls Limited (NSE:SBCL) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

With its stock down 23% over the past three months, it is easy to disregard Shivalik Bimetal Controls (NSE:SBCL). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Shivalik Bimetal Controls' ROE.

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.

See our latest analysis for Shivalik Bimetal Controls

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 Shivalik Bimetal Controls is:

22% = ₹804m ÷ ₹3.7b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.22 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. 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.

Shivalik Bimetal Controls' Earnings Growth And 22% ROE

To begin with, Shivalik Bimetal Controls seems to have a respectable ROE. Especially when compared to the industry average of 12% the company's ROE looks pretty impressive. This certainly adds some context to Shivalik Bimetal Controls' exceptional 34% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Shivalik Bimetal Controls' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 28%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Shivalik Bimetal Controls''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shivalik Bimetal Controls Making Efficient Use Of Its Profits?

Shivalik Bimetal Controls' ' three-year median payout ratio is on the lower side at 7.1% implying that it is retaining a higher percentage (93%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Moreover, Shivalik Bimetal Controls is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend.

Conclusion

Overall, we are quite pleased with Shivalik Bimetal Controls' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.