Lloyds Steels Industries Limited (NSE:LSIL) fundamentals look pretty solid: Could the market be wrong about the stock?
It’s hard to get excited after looking at the recent performance of Lloyds Steels Industries (NSE:LSIL), as its stock is down 31% in the past three months. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In particular, we will pay attention to the ROE of Lloyds Steels Industries today.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest analysis for Lloyds Steels Industries
How to calculate return on equity?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Lloyds Steels Industries is:
4.4% = ₹59 million ÷ ₹1.4 billion (based on the last twelve months to March 2022).
The “yield” is the profit of the last twelve months. This means that for every ₹ of equity, the company generated ₹0.04 of profit.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Lloyds Steels Industries earnings growth and ROE of 4.4%
It is clear that the ROE of Lloyds Steels Industries is rather weak. Even compared to the industry average of 13%, the ROE figure is quite disappointing. However, the moderate net income growth of 8.9% seen by Lloyds Steels Industries over the past five years is definitely positive. We believe there could be other aspects that positively influence the company’s earnings 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 benchmarked Lloyds Steels Industries’ net income growth against the industry and were disappointed to see that the company’s growth is below the industry average growth of 13% over the course of the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. Is Lloyds Steels Industries correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Is Lloyds Steels Industries using its retained earnings efficiently?
Lloyds Steels Industries currently pays no dividends, which essentially means that it has reinvested all of its profits back into the business. This certainly contributes to the decent number of earnings growth we discussed above.
All in all, it seems that Lloyds Steels Industries has some positive aspects to its business. Namely, its respectable earnings growth, which it achieved while retaining most of its earnings. However, given the low ROE, investors may not be benefiting from all that reinvestment after all. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. Our risk dashboard would have the 2 risks we identified for Lloyds Steels Industries.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.