Kabra Extrusiontechnik Limited (NSE:KABRAEXTRU) stock has seen strong momentum: does this call for further study of its financial outlook?

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Kabra Extrusiontechnik (NSE: KABRAEXTRU) has had a great run in the stock market with a significant 13% increase in its shares over the past week. 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 Kabra Extrusiontechnik’s ROE.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check opportunities and risks within the IN Machinery industry.

How do you 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 Kabra Extrusiontechnik is:

9.6% = ₹317 million ÷ ₹3.3 billion (based on the last twelve months to June 2022).

“Yield” refers to a company’s earnings over the past year. Another way to think about this is that for every ₹1 worth of equity, the company was able to make a profit of ₹0.10.

What is the relationship between ROE and 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 all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Kabra Extrusiontechnik earnings growth and ROE of 9.6%

At first glance, the ROE of Kabra Extrusiontechnik is not much to say. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 13%. Still, Kabra Extrusiontechnik has seen decent net income growth of 14% over the past five years. Thus, the company’s earnings growth could likely have been caused by other variables. Such as – high revenue retention or effective management in place.

We then performed a comparison between Kabra Extrusiontechnik’s net income growth and that of the industry, which revealed that the company’s growth is similar to the average industry growth of 16% over the same period.

NSEI: KABRAEXTRU Past Earnings Growth Nov 1, 2022

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. This then helps them determine if the stock is positioned for a bright or bleak future. 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 Kabra Extrusiontechnik is trading on a high P/E or a low P/E, relative to its industry.

Does Kabra Extrusiontechnik use its retained earnings effectively?

With a three-year median payout ratio of 30% (implying the company retains 70% of its earnings), it appears that Kabra Extrusiontechnik is effectively reinvesting in a way to see respectable earnings growth and pay out a dividend. well covered.

Moreover, Kabra Extrusiontechnik has paid dividends over a period of at least ten years, which means that the company is quite serious about sharing its profits with shareholders.

Conclusion

Overall, we feel Kabra Extrusiontechnik has positive attributes. 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. You can see the 1 risk we have identified for Kabra Extrusiontechnik by visiting our risk dashboard for free on our platform here.

Valuation is complex, but we help make it simple.

Find out if Kabra Extrusiontechnik is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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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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