Are Surani Steel Tubes Limited’s (NSE:SURANI) fundamentals good enough to warrant a buy given the stock’s recent weakness?

With its stock down 31% in the past three months, it’s easy to overlook Surani Steel Tubes (NSE: SURANI). However, the company’s fundamentals look pretty decent and long-term financials are generally in line with future market price movements. In particular, we will pay attention to the ROE of Surani Steel Tubes today.

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 short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

See our latest analysis for Surani Steel Tubes

How is ROE calculated?

The ROE formula is:

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

So, based on the above formula, the ROE for Surani steel pipes is:

7.5% = ₹19 million ÷ ₹246 million (based on the last twelve months to March 2022).

The “yield” is the profit of the last twelve months. This means that for every ₹1 of equity, the company generated ₹0.08 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 those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings 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.

A Side-by-Side Comparison of Surani Steel Tubes Earnings Growth and ROE of 7.5%

It is difficult to say that the ROE of Surani Steel Tubes is very good by itself. Even compared to the industry average of 15%, the ROE figure is quite disappointing. Despite this, Surani Steel Tubes has been able to increase its net profit significantly, at a rate of 35% over the past five years. Therefore, there could be other reasons behind this growth. Such as – high revenue retention or effective management in place.

Then, comparing with the industry net income growth, we found that the growth of Surani Steel Tubes is quite high compared to the average industry growth of 24% over the same period, which is great to see.

NSEI:SURANI Past Earnings Growth October 1, 2022

Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. Thus, you may want to check whether Surani Steel Tubes is trading on a high P/E or a low P/E, relative to its industry.

Does Surani Steel Tubes use its profits effectively?

Surani Steel Tubes does not pay any dividends to its shareholders, which means that the company has reinvested all of its profits back into the business. This is probably what explains the strong earnings growth discussed above.

Conclusion

All in all, it seems that Surani Steel Tubes has positive aspects for its business. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in 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. Our risk dashboard would have the 3 risks we identified for Surani Steel Tubes.

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.

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About Meredith Campagna

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