Will the weakness in Shree Cement Limited (NSE: SHREECEM) stocks prove temporary given strong fundamentals?

It’s hard to get excited after looking at the recent performance of Shree Cement (NSE: SHREECEM), as its stock has fallen 9.3% in the past month. However, a closer look at his strong finances might get you to think again. Since fundamentals usually determine long-term market outcomes, the business is worth considering. In particular, we will be paying close attention to the ROE of Shree Cement today.

ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.

See our latest review for Shree Cement

How to calculate return on equity?

The return on equity formula is:

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

So, based on the above formula, the ROE for Shree Cement is:

17% = ₹ 26b ÷ ₹ 154b (Based on the last twelve months up to June 2021).

The “return” is the amount earned after tax over the past twelve months. So this means that for every 1 of its shareholder’s investments, the company generates a profit of ₹ 0.17.

What is the relationship between ROE and profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

Shree Cement profit growth and 17% ROE

For starters, Shree Cement’s ROE seems acceptable. Even compared to the industry average of 14%, the company’s ROE looks pretty decent. This probably partly explains Shree Cement’s moderate 17% growth over the past five years, among other factors.

Then, comparing Shree Cement’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 19% over the same period.

NSEI Past Profit Growth: SHREECEM October 14, 2021

Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. If you’re wondering about Shree Cement’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.

Is Shree Cement Using Profits Effectively?

In the case of Shree Cement, its respectable profit growth is likely due to its low three-year median payout rate of 13% (or an 87% retention rate), which suggests that the company is investing most of its profits to develop its activity. .

In addition, Shree Cement has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with its shareholders. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 13% of its profits over the next three years. As a result, Shree Cement’s ROE is not expected to change much either, which we have deduced from analysts’ estimate of 17% for future ROE.

Summary

Overall, we are quite happy with the performance of Shree Cement. Specifically, we like the fact that the company reinvests a large portion of its profits at a high rate of return. This of course allowed the company to experience substantial growth in profits. The latest forecasts from industry analysts show the company is expected to maintain its current growth rate. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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About Meredith Campagna

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