Should the weakness in BEML Limited (NSE:BEML) shares be taken as a sign that the market will correct the share price given decent financials?

With its stock down 23% in the past three months, it’s easy to overlook BEML (NSE:BEML). But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In particular, we’ll be paying close attention to BEML’s ROE today.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simpler terms, it measures a company’s profitability relative to equity.

See our latest analysis for BEML

How do you calculate return on equity?

Return on equity can be calculated using the formula:

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

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

5.5% = ₹1.3 billion ÷ ₹24 billion (based on the last twelve months to March 2022).

“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 ₹0.05.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Growth in BEML earnings and ROE of 5.5%

It is clear that the ROE of BEML is rather weak. Even compared to the industry average ROE of 11%, the company’s ROE is pretty dismal. BEML was still able to record a decent growth in net income of 5.6% over the past five years. We believe there could be other factors at play here. 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.

Then, when comparing with industry net income growth, we found that BEML’s reported growth was lower than industry growth by 12% over the same period, which we don’t like. see.

NSEI: BEML Past Earnings Growth June 17, 2022

Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Is BEML correctly valued compared to other companies? These 3 assessment metrics might help you decide.

Does BEML use its profits efficiently?

With a three-year median payout ratio of 36% (implying the company retains 64% of its earnings), it appears that BEML is effectively reinvesting to see respectable earnings growth and paying a well-covered dividend. .

Moreover, BEML has paid dividends over a period of at least ten years, which means that the company is quite serious about sharing its profits with its shareholders.

Conclusion

Overall, we feel BEML has positive attributes. In other words, decent earnings growth supported by a high rate of reinvestment. However, we believe that this earnings growth could have been higher if the company were to improve the low ROE rate. Especially considering how the company reinvests a huge portion of its profits. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. You can see the 2 risks we have identified for BEML by visiting our risk dashboard for free on our platform here.

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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