AMD Industries (NSE:AMDIND) has had a great run in the stock market with a significant 123% rise in its shares over the past three months. 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. . Specifically, we decided to study the ROE of AMD Industries in this article.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest analysis for AMD Industries
How is ROE calculated?
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 AMD Industries is:
11% = ₹157 million ÷ ₹1.4 billion (based on the last twelve months to June 2022).
The “yield” is the amount earned after tax over the last twelve months. So this means that for every ₹1 of its shareholder’s investment, the company generates a profit of ₹0.11.
Why is ROE important for earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. 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 relative to companies that don’t necessarily exhibit these characteristics.
AMD Industries earnings growth and ROE of 11%
At first glance, AMD Industries’ ROE doesn’t look very promising. However, its ROE is similar to the industry average of 12%, so we won’t dismiss the company altogether. Additionally, we are quite pleased to see that AMD Industries’ bottom line has grown significantly at a rate of 52% over the past five years. Given the slightly weak ROE, it is likely that other factors could be driving this growth. 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.
As a next step, we benchmarked AMD Industries’ net income growth against the industry, and fortunately found that the growth the company saw was above the industry average growth of 18%.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title 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 might want to check whether AMD Industries is trading on a high P/E or a low P/E, relative to its industry.
Is AMD Industries using its profits efficiently?
Since AMD Industries pays no dividends to its shareholders, we infer that the company has reinvested all of its profits to grow its business.
All in all, it looks like AMD Industries has positives for its business. With a high reinvestment rate, albeit at a low ROE, the company managed to see considerable growth in earnings. 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 AMD Industries.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.
Calculation of discounted cash flows for each share
Simply Wall St performs a detailed calculation of discounted cash flow every 6 hours for every stock in the market, so if you want to find the intrinsic value of any company, just search here. It’s free.