Is the latest stock market performance of 20 Microns Limited (NSE: 20MICRONS) a reflection of its financial health?

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The 20 Microns (NSE: 20MICRONS) share rose 19% over the past week. 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 results. In this article, we have decided to focus on the ROE of 20 Microns.

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 other words, it reveals the company’s success in turning shareholders’ investments into profits.

See our latest analysis for 20 Microns

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 20 microns is:

16% = ₹ 343m ÷ ₹ 2.2b (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 ₹ 0.16.

Why is ROE important for profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of 20 micron profit growth and 16% ROE

At first glance, 20 Microns seems to have a decent ROE. Even compared to the industry average of 16%, the company’s ROE looks pretty decent. Therefore, this likely laid the groundwork for the decent 7.2% growth seen over the past five years of 20 microns.

As a next step, we compared the 20 Micron net income growth with the industry and were disappointed to see that the company growth is lower than the industry average growth of 18% over the same period. period.

NSEI: 20 MICRONS Past Profit Growth September 16, 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. This then helps them determine whether the stock is set for a bright or dark future. If you are wondering about the valuation of 20 Microns, check out this gauge of its price / earnings ratio, relative to its industry.

20 Is Microns Efficiently Reinvesting Its Profits?

Although the company has paid part of its dividend in the past, it currently does not pay any dividends. We deduce that the company has reinvested all its profits to develop its activity.

Summary

Overall, we are quite satisfied with the performance of the 20 Microns. In particular, we like the fact that the company is reinvesting heavily in its business and at a high rate of return. As a result, its decent profit growth is not surprising. If the company continues to grow earnings like it has, it could have a positive impact on its stock price given the influence of earnings per share on long-term stock prices. Let’s not forget that trading risk is also one of the factors that affect the stock price. So this is also an important area that investors should pay attention to before making a decision on a business. Our risk dashboard would have the 2 risks we identified for 20 Microns.

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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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