Has Tamilnadu Petroproducts Limited's (NSE:TNPETRO) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Tamilnadu Petroproducts' (NSE:TNPETRO) stock is up by a considerable 44% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Tamilnadu Petroproducts' ROE today.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Tamilnadu Petroproducts

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Tamilnadu Petroproducts is:

14% = ₹696m ÷ ₹5.0b (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.14 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

Tamilnadu Petroproducts' Earnings Growth And 14% ROE

On the face of it, Tamilnadu Petroproducts' ROE is not much to talk about. However, its ROE is similar to the industry average of 13%, so we won't completely dismiss the company. Even so, Tamilnadu Petroproducts has shown a fairly decent growth in its net income which grew at a rate of 16%. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Tamilnadu Petroproducts' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth 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. 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 Tamilnadu Petroproducts is trading on a high P/E or a low P/E, relative to its industry.

Is Tamilnadu Petroproducts Using Its Retained Earnings Effectively?

Tamilnadu Petroproducts' three-year median payout ratio to shareholders is 16% (implying that it retains 84% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, Tamilnadu Petroproducts has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we do feel that Tamilnadu Petroproducts has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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 3 risks we have identified for Tamilnadu Petroproducts 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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