Most readers already know that Shanthi Gears (NSE: SHANTIGEAR) stock has risen 9.2% in the past three months. Given that stock prices typically follow long-term business performance, we wonder if the company’s mixed financial results could have a negative effect on its current price movement. In this article, we have decided to focus on Shanthi Gears ROE.
ROE or Return on Equity is a useful tool to assess how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest review for Shanthi Gears
How do you calculate return on equity?
the formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Shanthi Gears’ ROE is:
8.5% = ₹ 202m ÷ ₹ 2.4b (Based on the last twelve months up to March 2021).
“Return” refers to a company’s profits over the past year. So this means that for every 1 of its shareholder’s investments, the company generates a profit of ₹ 0.09.
What is the relationship between ROE and profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on how much of those profits the company reinvests or “withholds” and its efficiency, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Shanthi Gears profit growth and 8.5% ROE
It is difficult to say that Shanthi Gears’ ROE is very good on its own. A comparison with the industry shows that the company’s ROE is quite similar to the industry’s average ROE of 10%. Thus, the low ROE provides some context for Shanthi Gears’ stable net income growth over the past five years.
As a next step, we compared Shanthi Gears’ net income growth with the industry and found that the industry experienced an average growth of 8.9% over the same period.
Profit growth is an important factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. If you’re wondering about Shanthi Gears valuation, check out this gauge of its price / earnings ratio, relative to its industry.
Is Shanthi Gears Using Retained Earnings Effectively?
Despite a normal three-year median payout rate of 43% (implying that the company keeps 57% of its revenue) over the past three years, Shanthi Gears has experienced negligible profit growth, as we have seen. above. So there could be other factors at play here that could potentially hamper growth. For example, the company faced headwinds.
Additionally, Shanthi Gears has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth.
Overall, we have mixed feelings about Shanthi Gears. Although the company has a high rate of profit retention, its low rate of return is likely to hamper its profit growth. So far, we’ve only had a brief discussion of how the company’s earnings grow. To better understand Shanthi Gears’ past earnings growth, check out this visualization of past earnings, income, and cash flow.
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