Is West Coast Paper Mills Limited's (NSE:WSTCSTPAPR) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

West Coast Paper Mills (NSE:WSTCSTPAPR) has had a great run on the share market with its stock up by a significant 11% over the last week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on West Coast Paper Mills' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for West Coast Paper Mills

How Is ROE Calculated?

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 West Coast Paper Mills is:

32% = ₹11b ÷ ₹35b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.32 in profit.

What Is The Relationship Between ROE And 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 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.

West Coast Paper Mills' Earnings Growth And 32% ROE

First thing first, we like that West Coast Paper Mills has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 12% which is quite remarkable. As a result, West Coast Paper Mills' exceptional 32% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared West Coast Paper Mills' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 24%.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 West Coast Paper Mills''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is West Coast Paper Mills Using Its Retained Earnings Effectively?

West Coast Paper Mills' ' LTM (or last twelve month) payout ratio is on the lower side at 7.0% implying that it is retaining a higher percentage (93%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Besides, West Coast Paper Mills 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

In total, we are pretty happy with West Coast Paper Mills' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 1 risk we have identified for West Coast Paper Mills by visiting our risks dashboard for free on our platform here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.