It’s hard to get excited after watching the recent performance of Tube Investments of India (NSE: TIINDIA), as its stock is down 11% over the past week. However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. In this article, we have decided to focus on the ROE of Tube Investments of India.
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 Tube Investments of India
How is 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 for Tube Investments of India is:
28% = ₹9.3 billion ÷ ₹34 billion (based on the last twelve months to December 2021).
“Yield” refers to a company’s earnings over the past year. This means that for every ₹ of equity, the company generated ₹0.28 of profit.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. 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.
Investments in India’s earnings growth tube and 28% ROE
For starters, Tube Investments of India has quite a high ROE, which is interesting. Second, even when compared to the industry average of 11%, the company’s ROE is quite impressive. Under these circumstances, a considerable growth in net income of 26% over five years of Tube Investments of India was to be expected.
Then, comparing with the industry net income growth, we found that the growth figure reported by Tube Investments of India compares quite favorably to the industry average, which shows a decline of 1.2% during the same period.
Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about the valuation of Tube Investments of India, check out this indicator of its price/earnings ratio, relative to its industry.
Does Tube Investments of India make effective use of its retained earnings?
Tube Investments of India has a very low three-year median payout ratio of 20%, meaning it has the remaining 80% left to reinvest in its business. This suggests that management reinvests most of the profits to grow the business, as evidenced by the growth seen by the business.
Additionally, Tube Investments of India is determined to continue sharing its profits with shareholders, which we infer from its long four-year history of paying dividends. Our latest analyst data shows the company’s future payout ratio is expected to drop to 5.2% over the next three years. However, the company’s ROE is not expected to change much despite the lower expected payout ratio.
Overall, we are quite satisfied with the performance of Tube Investments of India. In particular, it is good to see that the company is investing heavily in its business, and together with a high rate of return, this has led to significant growth in its profits. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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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.