Sree Rayalaseema Hi-Strength Hypo Limited's (NSE:SRHHYPOLTD) Stock Been Rising: Are Strong Financials Guiding The Market?

Sree Rayalaseema Hi-Strength Hypo's (NSE:SRHHYPOLTD) stock is up by 5.7% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Sree Rayalaseema Hi-Strength Hypo'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Sree Rayalaseema Hi-Strength Hypo

How To 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 Sree Rayalaseema Hi-Strength Hypo is:

16% = ₹584m ÷ ₹3.6b (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.16 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Sree Rayalaseema Hi-Strength Hypo's Earnings Growth And 16% ROE

At first glance, Sree Rayalaseema Hi-Strength Hypo seems to have a decent ROE. Especially when compared to the industry average of 13% the company's ROE looks pretty impressive. This probably laid the ground for Sree Rayalaseema Hi-Strength Hypo's moderate 20% net income growth seen over the past five years.

We then compared Sree Rayalaseema Hi-Strength Hypo's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 14% in the same period.

Earnings growth is a huge factor in stock valuation. 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. Is Sree Rayalaseema Hi-Strength Hypo fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sree Rayalaseema Hi-Strength Hypo Using Its Retained Earnings Effectively?

Sree Rayalaseema Hi-Strength Hypo's three-year median payout ratio to shareholders is 11% (implying that it retains 89% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, Sree Rayalaseema Hi-Strength Hypo has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Sree Rayalaseema Hi-Strength Hypo's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 3 risks we have identified for Sree Rayalaseema Hi-Strength Hypo visit our risks dashboard for free.

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This article by Simply Wall St is general in nature. 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.
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