AIA Engineering (NSE:AIAENG) has had a strong run in the stock market with a significant 7.8% rise in its stock over the past month. Since stock prices are usually aligned with a company’s financial performance over the long term, we decided to take a closer look at its financial indicators to see if they had a role to play in the recent price movement. . In this article, we decided to focus on AIA Engineering’s ROE.
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 other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Check out our latest analysis for AIA Engineering
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for AIA Engineering is:
13% = ₹5.6 billion ÷ ₹44 billion (based on the last twelve months to December 2021).
The “yield” is the amount earned after tax over the last twelve months. One way to conceptualize this is that for every ₹1 of share capital it has, the company has made a profit of ₹0.13.
What is the relationship between ROE and earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Based on the share 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. 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.
Profit growth and 13% ROE from AIA Engineering
At first glance, AIA Engineering’s ROE does not look very promising. However, its ROE is similar to the industry average of 13%, so we won’t dismiss the company completely. In contrast, AIA Engineering has recorded moderate growth of 7.1% in net profit over the past five years. Considering the fact that ROE is not particularly high, we believe that there could also be other factors at play that could influence the growth of the business. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
Then, comparing with industry net income growth, we found that AIA Engineering’s reported growth was lower than industry growth of 13% over the same period, which we don’t. don’t like to see.
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. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. Is AIA Engineering correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does AIA Engineering use its profits efficiently?
AIA Engineering’s three-year median payout ratio to shareholders is 7.5% (implying it keeps 93% of its revenue), which is pretty low, so it looks like management is reinvesting heavily benefits to grow your business.
Also, AIA Engineering has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Looking at current analyst consensus data, we can see that the company’s future payout ratio is expected to reach 21% over the next three years. Despite the higher expected payout ratio, the company’s ROE is not expected to change much.
Overall, we feel AIA Engineering has positive attributes. Namely, its respectable earnings growth, which it achieved while retaining most of its profits. However, given the low ROE, investors may not be benefiting from all that reinvestment after all. That said, looking at current analyst estimates, we found that the company’s earnings are expected to accelerate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
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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.