Most readers already know that shares of SJVN (NSE:SJVN) are up a significant 6.2% over the past week. However, we have decided to pay close attention to its weak finances as we doubt the current momentum will continue given the scenario. In particular, we will be paying attention to SJVN’s ROE today.
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 other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
See our latest analysis for SJVN
How is ROE calculated?
the ROE formula East:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for SJVN is:
12% = ₹16 billion ÷ ₹134 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 ₹1 of equity, the company generated ₹0.12 of profit.
Why is ROE important for 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. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
A side-by-side comparison of SJVN earnings growth and 12% ROE
At first glance, SJVN’s ROE does not look very promising. However, since the company’s ROE is similar to the industry average ROE of 12%, we can spare it some thought. We can see that SJVN grew at an average five-year net income growth rate of 2.8%, which is a bit lower. Keep in mind that the company’s ROE is not very high. Therefore, this provides some context to the weak earnings growth the company is seeing.
We then compared SJVN’s net income growth with the industry and found that the company’s growth figure is lower than the industry average growth rate of 13% over the same period, which is a little worrying.
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. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Has the market priced in SJVN’s future prospects? You can find out in our latest infographic research report on intrinsic value
Does SJVN effectively reinvest its profits?
With a high three-year median payout ratio of 55% (or a retention rate of 45%), most of SJVN’s earnings are paid out to shareholders. This certainly contributes to the weak earnings growth the company has seen.
Additionally, SJVN has paid dividends over a period of at least ten years, which means the company’s management is committed to paying dividends even if it means little or no earnings growth.
All in all, we would find it hard to think before deciding on any investment action regarding SJVN. The company has experienced a lack of earnings growth due to the fact that it retains very little profit and what little it retains is reinvested at a very low rate of return. In short, we believe the company is risky and investors should think twice before making a final judgment on this company. Our risk dashboard will contain the 1 risk we have identified for SJVN.
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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.