Are Tirupati Forge Limited's (NSE:TIRUPATIFL) Mixed Financials Driving The Negative Sentiment?

It is hard to get excited after looking at Tirupati Forge's (NSE:TIRUPATIFL) recent performance, when its stock has declined 14% over the past month. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on Tirupati Forge'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Tirupati Forge

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 Tirupati Forge is:

2.3% = ₹4.7m ÷ ₹206m (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.02 in profit.

Why Is ROE Important For 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. 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.

Tirupati Forge's Earnings Growth And 2.3% ROE

It is hard to argue that Tirupati Forge's ROE is much good in and of itself. Not just that, even compared to the industry average of 7.3%, the company's ROE is entirely unremarkable. Hence, the flat earnings seen by Tirupati Forge over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared Tirupati Forge'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 13% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Tirupati Forge's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Tirupati Forge Making Efficient Use Of Its Profits?

Summary

On the whole, we feel that the performance shown by Tirupati Forge can be open to many interpretations. 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. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Tirupati Forge's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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