Is the recent market performance of Sona BLW Precision Forgings Limited (NSE: SONACOMS) related to its strong fundamentals?


Most readers already know that the stock of Sona BLW Precision Forgings (NSE: SONACOMS) has increased significantly by 13% 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. Specifically, we decided to study the ROE of Sona BLW Precision Forgings in this article.

Return on equity or ROE is a key measure used to assess the efficiency with which the management of a company uses company capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest review for Sona BLW precision forgings

How is the ROE calculated?

ROE can be calculated using the formula:

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

So, based on the above formula, the ROE of Sona BLW Precision Forgings is:

18% = ₹ 3.1b ÷ ₹ 18b (Based on the last twelve months up to September 2021).

The “return” is the amount earned after tax over the past twelve months. So this means that for every 1 of its shareholder’s investments, the company generates a profit of ₹ 0.18.

What does ROE have to do with profit growth?

We have already established that ROE is an effective indicator of profit generation for a company’s future profits. 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. 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 Sona BLW Precision Forgings profit growth and 18% ROE

For starters, the ROE of Sona BLW Precision Forgings seems acceptable. Especially compared to the industry average of 11%, the company’s ROE looks pretty impressive. It is probably because of this that Sona BLW Precision Forgings has been able to record an impressive growth in net income of 31% over the past five years. We believe that there could also be other aspects that positively influence the company’s profit growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.

Considering that the industry cut its profits by 2.8% over the same period, the growth in the company’s net income is quite impressive.

NSEI: SONACOMS Growth in past profits on January 10, 2022

Profit growth is a huge factor in the valuation of stocks. 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 will have an idea if the action is heading for clear blue waters or swampy waters ahead. Is the value of Sona BLW Precision Forgings fair compared to other companies? These 3 evaluation measures could help you decide.

Is Sona BLW Precision Forgings Using Profits Effectively?

Although the company has paid part of its dividend in the past, it currently does not pay any dividends. This is probably what explains the high number of profit growth discussed above.

Summary

All in all, we are quite satisfied with the performance of Sona BLW Precision Forgings. 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 significant growth in its profits. The latest forecasts from industry analysts show the company is expected to maintain its current growth rate. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.

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.

About Ian Crawford

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