Shares of Torrent Power (NSE:TORNTPOWER) are up a hefty 14% over the past month. We wonder if and what role company finances play in that price change, since a company's long-term fundamentals often dictate market outcomes. In particular, we will be attentive to Torrent Power's ROA today.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success in turning shareholders' investments into profits.
See our latest Torrent Power review
How is ROE calculated?
the formula for return on capital is:
Return on equity = Net income (from continuing operations) รท Stockholders' equity
So, based on the formula above, Torrent Power's ROE is:
13% = โน13b รท โน105b (based on the last twelve months ending December 2021).
The 'yield' is the income the business earned during the last year. One way to conceptualize this is that for every โน1 of shareholders' equity it holds, the company made โน0.13 in profit.
Why is ROE important to earnings growth?
We have already established that ROE serves as an efficient profit-generating indicator for a company's future earnings. Now we need to assess how much profit the company reinvests or "retains" for future growth, which gives us an idea about the company's growth potential. Assuming all else remains unchanged, the higher ROE and earnings retention, the higher a company's growth rate compared to companies that don't necessarily have these characteristics.
Torrent Power earnings growth and 13% ROE
When you first look at it, Torrent Power's ROE doesn't seem all that appealing. However, since the company's ROE is similar to the industry average ROE of 12%, we can give it some thought. On the other hand, Torrent Power reported moderate net income growth of 14% over the past five years. Given the slightly low ROE, it is likely that there are other aspects that are driving this growth. Such as - high profit retention or efficient management in place.
We then performed a comparison of Torrent Power's net income growth with the industry, which revealed that the company's growth is similar to the industry average growth of 13% over the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings, whichever is the case, is discounted. By doing so, he'll have an idea of โโwhether the action is headed for clear blue waters or swampy waters ahead. Has the market assessed the future prospects of TORNTPOWER? You can find out at our latest intrinsic value infographic research report.
Is Torrent Power making efficient use of its benefits?
Torrent Power has a healthy combination of a moderate three-year average payout rate of 37% (or a retention rate of 63%) and a respectable amount of earnings growth, as we saw earlier, which means the company has been making efficient use of their earnings
In addition, Torrent Power has paid dividends for a period of at least ten years, which means that the company is very serious about sharing its profits with shareholders. The latest data from our analysts shows that the company's future payout ratio over the next three years is expected to be approximately 41%. As a result, Torrent Power's ROE is also not expected to change much, which we infer from the analyst estimate of 13% for future ROE.
Conclution
All in all, it looks like Torrent Power has some positives going for it. Even despite the poor rate of return, the company has posted impressive earnings growth as a result of heavy reinvestment in its business. That being the case, a study of the latest analyst forecasts shows that the company is expected to experience a slowdown in future earnings growth. To learn more about the latest analyst predictions for the company, check out this visualization of analyst forecasts for the company.
Do you have comments about this article? Concerned about the content? Get in touch with us directly. Alternatively, email the editorial team (at) Simplywallst.com.
This Simply Wall St article is of a general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock, and it does not take into account your goals or financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
