Birla Corporation Limited (NSE: BIRLACORPN) shares have experienced strong momentum: does this require a more in-depth study of its financial outlook?
Birla (NSE: BIRLACORPN) has had a strong run in the equity market with its stock rising significantly 10% over the past week. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . In particular, we will be paying special attention to Birla’s ROE today.
Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how efficiently their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for Birla
How is the ROE calculated?
The return on equity formula is:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for Birla is:
13% = â¹ 7.1b Ã· â¹ 55b (Based on the last twelve months up to June 2021).
The “return” is the annual profit. This means that for every 1 of equity, the company generated â¹ 0.13 in profit.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess how much profit the business is reinvesting or “holding back” for future growth, which then gives us an idea of ââthe growth potential of the business. 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.
Birla profit growth and 13% ROE
At first glance, Birla’s ROE doesn’t look very promising. However, given that the company’s ROE is similar to the industry average ROE of 14%, we can think about it. Additionally, we are very pleased to see that Birla’s bottom line has grown significantly at a rate of 36% over the past five years. Given the slightly low ROE, it is likely that other aspects are behind this growth. For example, the business has a low payout ratio or is managed efficiently.
We then compared Birla’s net income growth with the industry and we are happy to see that the company’s growth figure is higher compared to the industry which has a 20% growth rate over the course of from the same period.
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. If you’re wondering about Birla’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.
Is Birla Using Her Retained Earnings Effectively?
Birla’s three-year median payout ratio is less than 17%, implying that it retains a higher percentage (83%) of its profits. This suggests that management is reinvesting most of the profits to grow the business, as evidenced by the growth seen by the business.
Additionally, Birla has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with its shareholders. Our latest analyst data shows the company’s future payout ratio is expected to reach 28% over the next three years. However, the company’s ROE is not expected to change much despite the expected higher payout ratio.
Overall, we think Birla has some positive attributes. Even despite the low rate of return, the company has shown impressive profit growth by reinvesting heavily in its operations. That said, the company’s earnings growth is expected to slow, as current analyst estimates predict. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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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