Shares of Servotech Power Systems Limited (NSE:SERVOTECH) are on a bullish trend: could fundamentals be behind the momentum?

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Most readers are already aware that shares of Servotech Power Systems (NSE: SERVOTECH) are up a significant 117% in the past month. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. In this article, we decided to focus on the ROE of Servotech Power Systems.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simpler terms, it measures a company’s profitability relative to equity.

See our latest review for Servotech Power Systems

How do you 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 Servotech Power Systems is:

7.8% = ₹36 million ÷ ₹463 million (based on the last twelve months to June 2022).

“Yield” refers to a company’s earnings over the past year. This means that for every ₹1 of equity, the company generated ₹0.08 of profit.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. 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. 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.

Earnings growth and ROE of 7.8% from Servotech Power Systems

As you can see, Servotech Power Systems’ ROE seems quite low. Even compared to the industry average of 10%, the ROE figure is quite disappointing. However, we can see that Servotech Power Systems has seen a modest 15% net profit growth over the past five years. We believe there could be other factors at play here. Such as – high revenue retention or effective management in place.

In a next step, we benchmarked Servotech Power Systems’ net profit growth with the industry, and fortunately, we found that the growth the company saw was above the industry average growth of 9.8 %.

NSEI: SERVOTECH Past Earnings Growth September 12, 2022

Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. 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 Servotech Power Systems’ valuation, check out this indicator of its price-earnings ratio, relative to its industry.

Is Servotech Power Systems making effective use of its profits?

Summary

All in all, it seems that Servotech Power Systems has some positive aspects to 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. You can see the 2 risks we have identified for Servotech Power Systems by visiting our risk dashboard for free on our platform here.

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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