Shyam Metalics and Energy Limited's (NSE:SHYAMMETL) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Shyam Metalics and Energy's (NSE:SHYAMMETL) stock up by 4.8% over the past month. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement In this article, we decided to focus on Shyam Metalics and Energy's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Shyam Metalics and Energy

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Shyam Metalics and Energy is:

7.7% = ₹8.4b ÷ ₹109b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.08 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Shyam Metalics and Energy's Earnings Growth And 7.7% ROE

It is quite clear that Shyam Metalics and Energy's ROE is rather low. Even compared to the average industry ROE of 12%, the company's ROE is quite dismal. Accordingly, Shyam Metalics and Energy's low net income growth of 2.2% 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 Shyam Metalics and Energy's reported growth was lower than the industry growth of 28% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. 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 SHYAMMETL fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Shyam Metalics and Energy Using Its Retained Earnings Effectively?

Shyam Metalics and Energy has a low three-year median payout ratio of 6.8% (meaning, the company keeps the remaining 93% of profits) which means that the company is retaining more of its earnings. This should be reflected in its earnings growth number, but that's not the case. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Shyam Metalics and Energy has paid dividends over a period of three years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 7.5% of its profits over the next three years. However, Shyam Metalics and Energy's ROE is predicted to rise to 16% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we have mixed feelings about Shyam Metalics and Energy. 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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.