Sagardeep Alloys Limited (NSE: SAGARDEEP) shares soar but financial data looks inconsistent: will the uptrend continue?
Most readers already know that the stock of Sagardeep Alloys (NSE: SAGARDEEP) has increased significantly by 50% in the past three months. However, we wonder if the company’s inconsistent financial data would negatively impact the current momentum in stock prices. In particular, we will pay particular attention to the ROE of Sagardeep Alloys today.
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 other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest review for Sagardeep Alloys
How to calculate return on equity?
the formula for ROE is:
Return on equity = Net income (from continuing operations) Equity
Thus, based on the above formula, the ROE of Sagardeep Alloys is:
0.6% = ₹ 1.4m ÷ 258m (Based on the last twelve months up to March 2021).
The “return” is the profit of the last twelve months. This means that for every 1 of equity, the company generated ₹ 0.01 in profit.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Sagardeep Alloys profit growth and 0.6% ROE
It is quite clear that the ROE of Sagardeep Alloys is rather low. Not only that, even compared to the industry average of 9.6%, the company’s ROE is quite unremarkable. Therefore, it might not be wrong to say that the 27% five-year drop in net income seen by Sagardeep Alloys 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.
That being said, we compared the performance of Sagardeep Alloys with that of the industry and we got concerned when we found that although the company reduced its profits, the industry increased its profits at a rate of. 13% over the same period.
The basis for attaching value to a business is, to a large extent, related 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. In doing so, he’ll have an idea if the action is heading for clear blue waters or swampy waters ahead. Is Sagardeep Alloys just valued over other companies? These 3 evaluation measures could help you decide.
Is Sagardeep Alloys Efficiently Using Its Retained Earnings?
All in all, we are a little ambivalent about the performance of Sagardeep Alloys. 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. In conclusion, we would proceed with caution with this business and one way to do that would be to look at the risk profile of the business. You can see the 5 risks we have identified for Sagardeep Alloys by visiting our risk dashboard for free on our platform here.
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This Simply Wall St article is general in nature. 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 the mentioned stocks.
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