Will Weakness in Honeywell Automation India Limited's (NSE:HONAUT) Stock Prove Temporary Given Strong Fundamentals?

By
Simply Wall St
Published
October 19, 2020
NSEI:HONAUT

With its stock down 8.2% over the past month, it is easy to disregard Honeywell Automation India (NSE:HONAUT). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Honeywell Automation India's 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Honeywell Automation India

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 Honeywell Automation India is:

22% = ₹4.8b ÷ ₹22b (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.22 in profit.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Honeywell Automation India's Earnings Growth And 22% ROE

At first glance, Honeywell Automation India seems to have a decent ROE. Especially when compared to the industry average of 5.7% the company's ROE looks pretty impressive. Probably as a result of this, Honeywell Automation India was able to see an impressive net income growth of 31% over the last five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Honeywell Automation India's 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 14%.

past-earnings-growth
NSEI:HONAUT Past Earnings Growth October 20th 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Honeywell Automation India is trading on a high P/E or a low P/E, relative to its industry.

Is Honeywell Automation India Making Efficient Use Of Its Profits?

Honeywell Automation India's three-year median payout ratio to shareholders is 11%, which is quite low. This implies that the company is retaining 89% of its profits. So it looks like Honeywell Automation India is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Honeywell Automation India is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

Overall, we are quite pleased with Honeywell Automation India's 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.

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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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