Should the weakness in Techno Electric & Engineering Company Limited (NSE:TECHNOE) stock be taken as a sign that the market will correct the stock price given decent financials?

With its stock down 15% over the past week, it’s easy to overlook Techno Electric & Engineering (NSE: TECHNOE). 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 this article, we decided to focus on the ROE of Techno Electric & Engineering.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simple terms, it is used to assess the profitability of a company in relation to its equity.

Check out our latest analysis for Techno Electric & Engineering

How do you 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 Techno Electric & Engineering is:

14% = ₹2.4 billion ÷ ₹17 billion (based on the last twelve months to December 2021).

The “return” is the annual profit. This means that for every ₹1 of equity, the company generated ₹0.14 of profit.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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.

Techno Electric & Engineering earnings growth and ROE of 14%

At first glance, Techno Electric & Engineering’s ROE doesn’t have much to say. However, the fact that its ROE is well above the industry average of 8.0% does not go unnoticed by us. However, Techno Electric & Engineering has seen flat growth in net profit over the past five years, which is not saying much. Keep in mind that the company has a slightly low ROE. It’s just that the industry’s ROE is lower. Therefore, this partly explains the stagnation in earnings growth.

We then compared the net profit growth of Techno Electric & Engineering with the industry and we are happy to see that the growth figure of the company is higher compared to the industry which has a growth rate of 1 .3% over the same period.

NSEI: TECHNOE Past Earnings Growth May 12, 2022

Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. Is Techno Electric & Engineering correctly valued compared to other companies? These 3 assessment metrics might help you decide.

Does Techno Electric & Engineering effectively reinvest its profits?

With a high three-year median payout ratio of 52% (implying that the company retains only 48% of its revenue) from its business to reinvest in its business), most of Techno Electric & Engineering’s profits go to the shareholders, which explains the lack of revenue growth.

Also, Techno Electric & Engineering only recently started paying a dividend, so management had to decide that shareholders preferred dividends to earnings growth. Existing analyst estimates suggest the company’s future payout ratio is expected to drop to 31% over the next three years. Despite the lower expected payout ratio, the company’s ROE is not expected to change much.

Conclusion

Overall, we think Techno Electric & Engineering certainly has some positive factors to consider. Namely, the significant growth in its earnings, to which its moderate rate of return likely contributed. Although the company pays most of its profits in the form of dividends, it was able to increase its profits despite this, so this is probably a good sign. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. 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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