Is India Motor Parts & Accessories Limited's (NSE:IMPAL) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

India Motor Parts & Accessories' (NSE:IMPAL) stock is up by a considerable 30% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study India Motor Parts & Accessories' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for India Motor Parts & Accessories

How To 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 India Motor Parts & Accessories is:

4.7% = ₹467m ÷ ₹9.9b (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.05.

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. 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. 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.

A Side By Side comparison of India Motor Parts & Accessories' Earnings Growth And 4.7% ROE

It is hard to argue that India Motor Parts & Accessories' ROE is much good in and of itself. Still, the company's ROE is higher than the average industry ROE of 2.8% so that's certainly interesting. And more so given that India Motor Parts & Accessories has grown its net income at an acceptable rate of 12%. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Hence, there might be some other aspects that are causing earnings to grow. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared India Motor Parts & Accessories' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 21% in the same period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is IMPAL worth today? The intrinsic value infographic in our free research report helps visualize whether IMPAL is currently mispriced by the market.

Is India Motor Parts & Accessories Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 25% (implying that the company retains 75% of its profits), it seems that India Motor Parts & Accessories is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, India Motor Parts & Accessories has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we feel that India Motor Parts & Accessories certainly does have some positive factors to consider. Particularly, its earnings have grown respectably as we saw earlier, which was likely achieved due to the company reinvesting most of its earnings at a decent rate of return, to grow 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 2 risks we have identified for India Motor Parts & Accessories 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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