NDR Auto Components Limited (NSE:NDRAUTO) stock has seen strong momentum: does that call for further study of its financial outlook?
Most readers will already know that shares of NDR Auto Components (NSE: NDRAUTO) are up a significant 49% over the past three months. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. Specifically, we decided to study the ROE of NDR Auto Components in this article.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest analysis for NDR Auto Components
How is ROE calculated?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for NDR Auto Components is:
8.7% = ₹166 million ÷ ₹1.9 billion (based on the last twelve months to June 2022).
The “yield” is the amount earned after tax over the last twelve months. One way to conceptualize this is that for every ₹1 of share capital it has, the company has made a profit of ₹0.09.
What does ROE have to do with earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s 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.
A side-by-side comparison of NDR Auto Components’ earnings growth and ROE of 8.7%
As you can see, the ROE of NDR Auto Components seems quite low. Not only that, even compared to the industry average of 11%, the company’s ROE is quite unremarkable. Despite this, NDR Auto Components has been able to significantly increase its net profit, at a rate of 29% over the past five years. Therefore, there could be other reasons behind this growth. Such as – high revenue retention or effective management in place.
We then compared the net income growth of NDR Auto Components with the industry and we are glad to see that the growth figure of the company is higher compared to the industry which has a growth rate of 5, 2% over the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about the valuation of NDR Auto Components, check out this indicator of its price/earnings ratio, relative to its industry.
Does NDR Auto Components use its profits efficiently?
NDR Auto Components’ three-year median payout ratio to shareholders is 8.5%, which is quite low. This implies that the company retains 92% of its profits. This suggests that management reinvests most of the profits to grow the business, as evidenced by the growth seen by the business.
While NDR Auto Components has seen earnings growth, it only recently started paying a dividend. Chances are the company has decided to impress new and existing shareholders with a dividend.
Overall, we think NDR Auto Components has positive attributes. With a high reinvestment rate, albeit at a low ROE, the company managed to see considerable growth in earnings. 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. To learn about the 3 risks we have identified for NDR Auto Components, visit our risk dashboard for free.
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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.
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