With its shares falling 4.3% over the last month, it's easy to ignore Torrent Power (NSE: TORNTPOWER). But if you pay close attention, your key financials may look pretty decent, which could mean the stock could potentially rally in the long term, as markets often reward the toughest long-term fundamentals. In particular, we will be paying attention to Torrent power's ROE 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. In other words, it is a profitability index that measures the rate of return on capital contributed by the company's shareholders.
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How is ROE calculated?
the formula for ROE it is:
Return on equity = Net profit (from continuing operations) รท Stockholders' equity
So based on the formula above, the ROE for Torrent Power is:
11% = โน 11b รท โน 102b (based on the last twelve months through June 2021).
The 'performance' refers to the earnings of a company during the last year. That means that for every $ 1 worth of equity, the company generated $ 0.11 in profit.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Based on the amount of your earnings that the company decides to reinvest or "retain", we can assess the future ability of the company to generate profits. Assuming all else is equal, companies that have both a higher return on equity and a higher retention of earnings are usually the ones with a higher growth rate compared to companies that do not have the same characteristics.
Torrent Power Profit Growth and ROE of 11%
At first glance, Torrent Power's ROE isn't much to talk about. However, since the company's ROE is similar to the industry average ROE of 12%, we can give it some thought. Even so, Torrent Power has shown quite decent growth in its net income which grew at a rate of 14%. Given the slightly low ROE, other aspects are likely driving this growth. For example, the business has a low pay rate or is managed efficiently.
As a next step, we compare Torrent Power's net income growth to that of the industry and, pleasantly, find that the growth observed by the company is higher than the industry average growth of 10%.
The basis for assigning value to a company is, to a large extent, linked to the growth of its profits. What investors need to determine next is whether or not expected earnings growth is already built into the stock price. This helps them determine if the stock is set for a bright or bleak future. If you're wondering about Torrent Power's valuation, check out this indicator of your price-earnings ratio, compared to your industry.
Is Torrent Power making efficient use of its benefits?
Torrent Power has a healthy combination of a moderate three-year median pay 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 your earnings.
Additionally, Torrent Power has been paying dividends for at least ten years or more. This shows that the company is committed to sharing the profits with its shareholders. Studying the latest analyst consensus data, we find that the company is expected to continue to pay approximately 30% of its profits over the next three years. However, Torrent Power's ROE is projected to rise to 14% despite no change in its payout ratio anticipated.
conclusion
Overall, we think Torrent Power certainly has some positive factors to consider. With a high reinvestment rate, albeit with a low ROE, the company has managed to see considerable growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected to be similar to its current growth rate. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst's forecast page for the company.
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This Simply Wall St article is general in nature. We provide feedback based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares, and it does not take into account your objectives or your financial situation. Our goal is to provide you with long-term focused analysis based on 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 listed stocks.
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