Are Poor Financial Prospects Dragging Down Sunteck Realty Limited (NSE:SUNTECK Stock?

With its stock down 26% over the past three months, it is easy to disregard Sunteck Realty (NSE:SUNTECK). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study Sunteck Realty's ROE in this article.

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.

Check out our latest analysis for Sunteck Realty

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Sunteck Realty is:

6.4% = ₹2.0b ÷ ₹32b (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.06.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Sunteck Realty's Earnings Growth And 6.4% ROE

It is quite clear that Sunteck Realty's ROE is rather low. Further, we noted that the company's ROE is similar to the industry average of 6.5%. Thus, the low ROE provides some context to Sunteck Realty's flat net income growth over the past five years.

We then compared Sunteck Realty's net income growth with the industry and found that the average industry growth rate was 31% in the same 5-year period.

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. 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 Sunteck Realty is trading on a high P/E or a low P/E, relative to its industry.

Is Sunteck Realty Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 84% (implying that the company keeps only 16% of its income) of its business to reinvest into its business), most of Sunteck Realty's profits are being paid to shareholders, which explains the absence of growth in earnings.

Moreover, Sunteck Realty has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 5.2% over the next three years. As a result, the expected drop in Sunteck Realty's payout ratio explains the anticipated rise in the company's future ROE to 11%, over the same period.

Summary

Overall, we would be extremely cautious before making any decision on Sunteck Realty. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.