Tide Water Oil Co. (India) Limited's (NSE:TIDEWATER) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 3.6% over the past month, it is easy to disregard Tide Water Oil (India) (NSE:TIDEWATER). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Tide Water Oil (India)'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Tide Water Oil (India)

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 Tide Water Oil (India) is:

16% = ₹1.1b ÷ ₹6.8b (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.16 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of Tide Water Oil (India)'s Earnings Growth And 16% ROE

To begin with, Tide Water Oil (India) seems to have a respectable ROE. Especially when compared to the industry average of 12% the company's ROE looks pretty impressive. Despite this, Tide Water Oil (India)'s five year net income growth was quite low averaging at only 4.9%. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared Tide Water Oil (India)'s net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 14% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is TIDEWATER worth today? The intrinsic value infographic in our free research report helps visualize whether TIDEWATER is currently mispriced by the market.

Is Tide Water Oil (India) Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 70% (or a retention ratio of 30%), most of Tide Water Oil (India)'s profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, Tide Water Oil (India) has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

In total, it does look like Tide Water Oil (India) has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 1 risk we have identified for Tide Water Oil (India) 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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