DCM Shriram Limited (NSE: DCMSHRIRAM) stock is on an uptrend: is strong financial data driving the market?


DCM Shriram (NSE: DCMSHRIRAM) has had a strong run in the equity market with a significant 13% share increase in the past three months. 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 results. In particular, we will be paying close attention to DCM Shriram’s ROE today.

Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. Simply put, it is used to assess a company’s profitability against its equity.

Check out our latest analysis for DCM Shriram

How is the ROE calculated?

The return on equity formula is:

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

So, based on the above formula, the ROE for DCM Shriram is:

16% = ₹ 8.0b ÷ ₹ 49b (based on the last twelve months up to September 2021).

The “return” is the amount earned after tax over the past twelve months. This means that for every 1 in equity, the company generated 0.16 in profit.

What does ROE have to do with profit growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and its efficiency, we are then able to assess a company’s profit growth potential. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.

A side-by-side comparison of DCM Shriram’s profit growth and 16% ROE

For starters, DCM Shriram’s ROE seems acceptable. Even compared to the industry average of 15%, the company’s ROE looks pretty decent. Therefore, this likely laid the groundwork for the decent 5.9% growth seen over the past five years by DCM Shriram.

Next, comparing with the industry’s net income growth, we found that the reported growth of DCM Shriram was lower than the industry’s growth of 19% during the same period, which is not something we love to see.

NSEI: DCMSHRIRAM Past profit growth on December 4, 2021

Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine whether the future of the stock looks bright or threatening. If you’re wondering how DCM Shriram is valued, check out this gauge of its price / earnings ratio, relative to its industry.

Is DCM Shriram Efficiently Using Its Retained Earnings?

DCM Shriram has a low three-year median payout ratio of 18%, which means the company keeps the remaining 82% of its profits. This suggests that management is reinvesting most of the profits to grow the business.

In addition, DCM Shriram is committed to continuing to share its profits with its shareholders, which we can deduce from its long history of paying dividends for at least ten years.

Conclusion

Overall, we think DCM Shriram’s performance has been quite good. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in respectable growth in its profits. If the company continues to grow earnings like it has, it could have a positive impact on its stock price given the influence of earnings per share on long-term stock prices. It should be remembered that the results of stock prices also depend on the potential risks a company may face. It is therefore important that investors are aware of the risks inherent in the business. To know the 2 risks that we have identified for DCM Shriram visit our free risk dashboard.

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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 any stock 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 documents. Simply Wall St has no position in any of the stocks mentioned.

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