Shyam Metalics and Energy Limited's (NSE:SHYAMMETL) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Shyam Metalics and Energy (NSE:SHYAMMETL) has had a great run on the share market with its stock up by a significant 21% 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. In this article, we decided to focus on Shyam Metalics and Energy's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

We've discovered 1 warning sign about Shyam Metalics and Energy. View them for free.

How To 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:

8.3% = ₹9.1b ÷ ₹109b (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. 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?

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.

Shyam Metalics and Energy's Earnings Growth And 8.3% ROE

It is hard to argue that Shyam Metalics and Energy's ROE is much good in and of itself. Even when compared to the industry average of 11%, the ROE figure is pretty disappointing. Therefore, Shyam Metalics and Energy's 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 Shyam Metalics and Energy's reported growth was lower than the industry growth of 27% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Using Its Retained Earnings Effectively?

Shyam Metalics and Energy has a low three-year median payout ratio of 7.8% (or a retention ratio of 92%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

In addition, Shyam Metalics and Energy has been paying dividends over a period of four years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 7.2% of its profits over the next three years. Regardless, the future ROE for Shyam Metalics and Energy is predicted to rise to 16% despite there being not much change expected in its payout ratio.

Summary

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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.