Alkyl Amines Chemicals (NSE:ALKYLAMINE) has had a great run on the share market with its stock up by a significant 29% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Alkyl Amines Chemicals’ ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
How To Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Alkyl Amines Chemicals is:
37% = ₹3.0b ÷ ₹7.9b (Based on the trailing twelve months to March 2021).
The ‘return’ is the income the business earned over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.37 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
A Side By Side comparison of Alkyl Amines Chemicals’ Earnings Growth And 37% ROE
To begin with, Alkyl Amines Chemicals has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 14% the company’s ROE is quite impressive. Under the circumstances, Alkyl Amines Chemicals’ considerable five year net income growth of 32% was to be expected.
As a next step, we compared Alkyl Amines Chemicals’ net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 15%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Alkyl Amines Chemicals fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Alkyl Amines Chemicals Efficiently Re-investing Its Profits?
Alkyl Amines Chemicals’ three-year median payout ratio to shareholders is 18%, which is quite low. This implies that the company is retaining 82% of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.
Moreover, Alkyl Amines Chemicals is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.
In total, we are pretty happy with Alkyl Amines Chemicals’ performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let’s not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 2 risks we have identified for Alkyl Amines Chemicals visit our risks dashboard for free.
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