Are strong financials behind the recent rally in Trident Limited (NSE: TRIDENT) shares?

Trident (NSE: TRIDENT) stock is up 16% in the past month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. In particular, we’ll be paying attention to Trident’s ROE today.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

Check out our latest analysis for Trident

How to calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Trident is:

20% = ₹7.3 billion ÷ ₹36 billion (based on the last twelve months to December 2021).

“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every ₹1 of share capital it has, the company has made a profit of ₹0.20.

What does ROE have to do with earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. 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.

Trident earnings growth and ROE of 20%

At first glance, Trident seems to have a decent ROE. Compared to the industry average ROE of 12%, the company’s ROE looks quite remarkable. Probably because of this, Trident has been able to see a decent 12% growth over the past five years.

We then performed a comparison between Trident’s net income growth and that of the industry, which revealed that the company’s growth is similar to the average industry growth of 12% over the same period. period.

NSEI: TRIDENT Past Earnings Growth April 7, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. Is Trident correctly valued compared to other companies? These 3 assessment metrics might help you decide.

Does Trident effectively reinvest its profits?

Trident has a three-year median payout ratio of 50%, implying that it keeps the remaining 50% of its earnings. This suggests that its dividend is well covered and, given the decent growth the company has seen, it looks like management is reinvesting its earnings effectively.

Also, Trident has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows the company’s future payout ratio is expected to drop to 4.7% over the next three years. Either way, ROE is not expected to change much for the company despite the lower expected payout ratio.

Summary

All in all, we’re pretty happy with Trident’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, the latest forecasts from industry analysts show that the company’s earnings are set to accelerate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

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.

About Ian Crawford

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