Is Shyam Metalics and Energy Limited's (NSE:SHYAMMETL) Recent Price Movement Underpinned By Its Weak Fundamentals?

It is hard to get excited after looking at Shyam Metalics and Energy's (NSE:SHYAMMETL) recent performance, when its stock has declined 9.6% over the past three months. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Shyam Metalics and Energy's 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How Is ROE Calculated?

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 Shyam Metalics and Energy is:

8.2% = ₹9.2b ÷ ₹113b (Based on the trailing twelve months to June 2025).

The 'return' is the profit over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.08.

Check out our latest analysis for Shyam Metalics and Energy

What Is The Relationship Between ROE And 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.

Shyam Metalics and Energy's Earnings Growth And 8.2% ROE

It is hard to argue that Shyam Metalics and Energy's ROE is much good in and of itself. Even compared to the average industry ROE of 11%, the company's ROE is quite dismal. Given the circumstances, the significant decline in net income by 6.7% seen by Shyam Metalics and Energy over the last five years is not surprising. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

However, when we compared Shyam Metalics and Energy's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 26% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Shyam Metalics and Energy is trading on a high P/E or a low P/E, relative to its industry.

Is Shyam Metalics and Energy Efficiently Re-investing Its Profits?

When we piece together Shyam Metalics and Energy's low three-year median payout ratio of 6.8% (where it is retaining 93% of its profits), calculated for the last three-year period, we are puzzled by the lack of growth. This typically shouldn't be the case when a company is retaining most of its earnings. So there could be some other explanations in that regard. For example, the company's business may be deteriorating.

In addition, Shyam Metalics and Energy has been paying dividends over a period of four years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 8.0%. Regardless, the future ROE for Shyam Metalics and Energy is predicted to rise to 18% despite there being not much change expected in its payout ratio.

Conclusion

On the whole, we feel that the performance shown by Shyam Metalics and Energy can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.