Is the recent performance of SRF Limited (NSE:SRF) stock a reflection of its financial health?
Most readers will already know that SRF (NSE:SRF) stock is up 3.3% over the past month. Given its impressive performance, we decided to study the company’s key financial indicators, as a company’s long-term fundamentals usually dictate market outcomes. In particular, we will be paying attention to SRF’s ROE today.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest analysis for SRF
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 SRF is:
22% = ₹19 billion ÷ ₹86 billion (based on the last twelve months to March 2022).
The “return” is the annual profit. This therefore means that for every ₹1 of its shareholder’s investment, the company generates a profit of ₹0.22.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective earnings-generating indicator for a company’s future earnings. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
SRF earnings growth and ROE of 22%
At first glance, SRF seems to have a decent ROE. Compared to the industry average ROE of 15%, the company’s ROE looks quite remarkable. This certainly adds some context to SRF’s exceptional 30% net income growth over the past five years. However, there could also be other causes behind this growth. Such as – high revenue retention or effective management in place.
Then, comparing with the industry net income growth, we found that SRF’s growth is quite high compared to the industry average growth of 21% over the same period, which is great have.
Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Is the SRF correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does the SRF make effective use of its carryforward?
SRF’s three-year median payout ratio is below 12%, meaning it keeps a higher percentage (88%) of its earnings. This suggests that management reinvests most of the profits to grow the business, as evidenced by the growth seen by the business.
Moreover, SRF has paid dividends over a period of at least ten years, which means that the company is quite serious about sharing its profits with shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be approximately 11%. As a result, the company’s future ROE is also not expected to change much, with analysts predicting an ROE of 22%.
All in all, we are quite satisfied with SRF’s performance. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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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.