Is the recent stock market performance of Manaksia Aluminum Company Limited (NSE: MANAKALUCO) influenced by its fundamentals?
Most readers already know that the stock of Manaksia Aluminum (NSE: MANAKALUCO) has increased significantly by 41% over the past month. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . Concretely, we decided to study the ROE of Manaksia Aluminum in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.
See our latest review for Manaksia Aluminum
How to calculate return on equity?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Manaksia Aluminum is:
7.2% = ₹ 80m ÷ ₹ 1.1b (Based on the last twelve months up to September 2021).
The “return” is the annual profit. This means that for every having shareholders, the company generated 0.07 profit.
What does ROE have to do with profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess how much profit the business is reinvesting or “holding back” for future growth, which then gives us an idea of the growth potential of the business. 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.
A side-by-side comparison of Manaksia Aluminum’s 7.2% profit growth and ROE
As you can see, the ROE of Manaksia Aluminum seems quite low. Even compared to the industry average of 15%, the ROE figure is quite disappointing. Despite this, Manaksia Aluminum has been able to significantly increase its bottom line, at a rate of 31% over the past five years. We believe that there could be other aspects that positively influence the company’s profit growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
As a next step, we compared the net income growth of Manaksia Aluminum with the industry, and luckily, we found that the growth observed by the company is above the industry average growth by 15%.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. If you are wondering about the valuation of Manaksia Aluminum, check out this gauge of its price / earnings ratio, compared to its industry.
Does Manaksia Aluminum use its retained earnings efficiently?
Manaksia Aluminum does not currently pay any dividends, which essentially means that it has reinvested all of its profits in the business. This certainly contributes to the high number of profit growth we discussed above.
Overall, we think Manaksia Aluminum has some positive attributes. With a high reinvestment rate, but low ROE, the company has managed to see considerable growth in profits. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. You can see the 3 risks that we have identified for Manaksia Aluminum by visiting our risk dashboard for free on our platform here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.