Do Its Financials Have Any Role To Play In Driving Astra Microwave Products Limited's (NSE:ASTRAMICRO) Stock Up Recently?

Astra Microwave Products' (NSE:ASTRAMICRO) stock is up by a considerable 33% over the past three months. 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 Astra Microwave Products' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Astra Microwave Products is:

14% = ₹1.5b ÷ ₹11b (Based on the trailing twelve months to March 2025).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.14 in profit.

View our latest analysis for Astra Microwave Products

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Astra Microwave Products' Earnings Growth And 14% ROE

When you first look at it, Astra Microwave Products' ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 13%, we may spare it some thought. Looking at Astra Microwave Products' exceptional 34% five-year net income growth in particular, we are definitely impressed. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. 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.

As a next step, we compared Astra Microwave Products' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 34% in the same period.

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). 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 Astra Microwave Products is trading on a high P/E or a low P/E, relative to its industry.

Is Astra Microwave Products Efficiently Re-investing Its Profits?

Astra Microwave Products has a really low three-year median payout ratio of 18%, meaning that it has the remaining 82% left over to reinvest into its business. So it looks like Astra Microwave Products is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Astra Microwave Products 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. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 6.3% over the next three years. As a result, the expected drop in Astra Microwave Products' payout ratio explains the anticipated rise in the company's future ROE to 17%, over the same period.

Summary

On the whole, we do feel that Astra Microwave Products has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.