Can Mixed Fundamentals Have A Negative Impact on Vikas Proppant & Granite Limited (NSE:VIKASPROP) Current Share Price Momentum?

Most readers would already be aware that Vikas Proppant & Granite's (NSE:VIKASPROP) stock increased significantly by 43% over the past month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Vikas Proppant & Granite's ROE today.

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.

View our latest analysis for Vikas Proppant & Granite

How Do You Calculate Return On Equity?

Return on equity 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 Vikas Proppant & Granite is:

2.9% = ₹57m ÷ ₹2.0b (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.03.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Vikas Proppant & Granite's Earnings Growth And 2.9% ROE

It is quite clear that Vikas Proppant & Granite's ROE is rather low. Even compared to the average industry ROE of 11%, the company's ROE is quite dismal. In spite of this, Vikas Proppant & Granite was able to grow its net income considerably, at a rate of 52% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared Vikas Proppant & Granite'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 15% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Vikas Proppant & Granite fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Vikas Proppant & Granite Making Efficient Use Of Its Profits?

The really high three-year median payout ratio of 129% for Vikas Proppant & Granite suggests that the company is paying its shareholders more than what it is earning. In spite of this, the company was able to grow its earnings significantly, as we saw above. Having said that, the high payout ratio is definitely risky and something to keep an eye on. You can see the 5 risks we have identified for Vikas Proppant & Granite by visiting our risks dashboard for free on our platform here.

While Vikas Proppant & Granite has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Summary

Overall, we have mixed feelings about Vikas Proppant & Granite. While no doubt its earnings growth is pretty substantial, its ROE and earnings retention is quite poor. So while the company has managed to grow its earnings in spite of this, we are unconvinced if this growth could extend, especially during troubled times. Up till now, we've only made a short study of the company's growth data. To gain further insights into Vikas Proppant & Granite's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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