JTEKT India Limited (NSE: JTEKTINDIA) stock is up but financial data looks ambiguous: will momentum continue?
Most readers already know that the stock of JTEKT India (NSE: JTEKTINDIA) has risen significantly by 11% over the past week. However, we have decided to pay attention to the fundamentals of the company which do not seem to give a clear sign on the financial health of the company. Specifically, we decided to study the ROE of JTEKT India in this article.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. Simply put, it is used to assess a company’s profitability against its equity.
See our latest analysis for JTEKT India
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE of JTEKT India is:
8.2% = â¹ 515m â¹ 6.2b (Based on the last twelve months up to June 2021).
The “return” is the profit of the last twelve months. This means that for every having shareholders, the company generated 0.08 profit.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or âwithholdsâ and how efficiently it does so, 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.
A side-by-side comparison of JTEKT India’s 8.2% profit growth and ROE
It is quite clear that the ROE of JTEKT India is rather low. Even compared to the industry average ROE of 11%, the company’s ROE is pretty dismal. Therefore, it may not be wrong to say that the 12% drop in net profit over five years seen by JTEKT India may have been the result of lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. For example, the company has misallocated capital or the company has a very high payout rate.
Moreover, even compared to the industry, which cut its profits at a rate of 7.9% during the same period, we found that JTEKT India’s performance is quite disappointing, as it suggests that the company cut its profits at a faster rate. than industry.
Profit growth is a huge 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. This will help them determine whether the future of the stock looks bright or threatening. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if JTEKT India is trading high P / E or low P / E, relative to its industry.
Is JTEKT India Efficiently Reinvesting Its Profits?
Despite a normal three-year median payout ratio of 28% (where it retains 72% of its profits), JTEKT India has seen its profits decline 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, JTEKT India has paid dividends over a period of at least ten years, which means that the management of the company is committed to paying dividends even if it means little to no growth in earnings. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 29%. However, JTEKT India’s ROE is expected to increase to 14% although there is no expected change in its payout ratio.
All in all, we are a little ambivalent about the performance of JTEKT India. Even though it appears to be keeping most of its earnings, given the low ROE, investors might not benefit from all of this reinvestment after all. The weak earnings growth suggests that our theory is correct. That said, we have studied the latest analysts’ forecasts and found that while the company has cut profits in the past, analysts expect its profits to rise in the future. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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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 shares 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 material. Simply Wall St has no position in any of the stocks mentioned.
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