The Western India Plywoods Limited's (NSE:WIPL) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Western India Plywoods (NSE:WIPL) has had a great run on the share market with its stock up by a significant 17% over the last 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 Western India Plywoods' 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Western India Plywoods

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Western India Plywoods is:

6.9% = ₹30m ÷ ₹433m (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.07.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

Western India Plywoods' Earnings Growth And 6.9% ROE

It is quite clear that Western India Plywoods' ROE is rather low. Not just that, even compared to the industry average of 9.7%, the company's ROE is entirely unremarkable. Despite this, surprisingly, Western India Plywoods saw an exceptional 42% net income growth over the past five years. We believe that there might be 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.

Next, on comparing with the industry net income growth, we found that Western India Plywoods' growth is quite high when compared to the industry average growth of 28% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Western India Plywoods''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Western India Plywoods Using Its Retained Earnings Effectively?

The three-year median payout ratio for Western India Plywoods is 30%, which is moderately low. The company is retaining the remaining 70%. By the looks of it, the dividend is well covered and Western India Plywoods is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Western India Plywoods has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we feel that Western India Plywoods certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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. You can see the 2 risks we have identified for Western India Plywoods by visiting our risks dashboard for free on our platform here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.