Unipro's (MCX:UPRO) stock is up by 7.0% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Unipro's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Unipro is:
12% = ₽15b ÷ ₽124b (Based on the trailing twelve months to September 2020).
The 'return' is the profit over the last twelve months. So, this means that for every RUB1 of its shareholder's investments, the company generates a profit of RUB0.12.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. 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.
Unipro's Earnings Growth And 12% ROE
At first glance, Unipro's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 8.3%, is definitely interesting. This probably goes some way in explaining Unipro's moderate 7.8% growth over the past five years amongst other factors. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence there might be some other aspects that are causing earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.
We then performed a comparison between Unipro's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 7.8% in the same period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Unipro fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Unipro Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 84% (or a retention ratio of 16%) for Unipro suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Besides, Unipro has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 99%. Still, forecasts suggest that Unipro's future ROE will rise to 18% even though the the company's payout ratio is not expected to change by much.
Overall, we feel that Unipro certainly does have some positive factors to consider. Namely, its significant earnings growth, to which its moderate rate of return likely contributed. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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