Most readers will already know that shares of Happiest Minds Technologies (NSE: HAPPSTMNDS) have risen a significant 23% over the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. Specifically, we decided to study the ROE of Happiest Minds Technologies in this article.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
Our analysis indicates that HAPPSTMNDS is potentially overrated!
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 Happiest Minds Technologies is:
28% = ₹2.0 billion ÷ ₹7.2 billion (based on past twelve months to June 2022).
The “return” is the annual profit. This means that for every ₹ of equity, the company generated ₹0.28 of profit.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. 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. 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.
A side-by-side comparison of Happiest Minds Technologies’ earnings growth and 28% ROE
First, we appreciate that Happiest Minds Technologies has an impressive ROE. Second, a comparison with the average industry-reported ROE of 15% also does not go unnoticed for us. Under these circumstances, a considerable growth in net profit of 44% over five years was to be expected for Happiest Minds Technologies.
As a next step, we benchmarked Happiest Minds Technologies’ net income growth against the industry, and fortunately, we found that the growth the company saw was above the industry average growth of 16%.
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. If you’re wondering about the valuation of Happiest Minds Technologies, check out this indicator of its price/earnings ratio, relative to its sector.
Does Happiest Minds Technologies effectively reinvest its profits?
Happiest Minds Technologies has a three-year median payout ratio of 27% (where it retains 73% of its revenue), which is neither too low nor too high. On the face of it, the dividend is well covered and Happiest Minds Technologies is effectively reinvesting its earnings as evidenced by its exceptional growth discussed above.
Although Happiest Minds Technologies has seen growth in earnings, it only recently started paying a dividend. Chances are the company has decided to impress new and existing shareholders with a dividend.
Overall, we’re pretty happy with Happiest Minds Technologies’ performance. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. That said, the company’s earnings growth is expected to slow, as expected in current analyst estimates. 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.
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