AIA Engineering’s Financials Impressive Even As Stock Declines 8.5%

AIA Engineering (NSE:AIAENG) has had a rough month with its share price down 8.5%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on AIA Engineering’s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

Check out our latest analysis for AIA Engineering

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 AIA Engineering is:

15% = ₹7.7b ÷ ₹51b (Based on the trailing twelve months to September 2022).

The ‘return’ refers to a company’s earnings over the last year. That means that for every ₹1 worth of shareholders’ equity, the company generated ₹0.15 in profit.

Why Is ROE Important For 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.

AIA Engineering’s Earnings Growth And 15% ROE

At first glance, AIA Engineering seems to have a decent ROE. Even when compared to the industry average of 13% the company’s ROE looks quite decent. This certainly adds some context to AIA Engineering’s moderate 8.6% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that AIA Engineering’s reported growth was lower than the industry growth of 16% in the same period, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is AIA Engineering fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is AIA Engineering Using Its Retained Earnings Effectively?

AIA Engineering has a low three-year median payout ratio of 14%, meaning that the company retains the remaining 86% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Moreover, AIA Engineering 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. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to rise to 17% over the next three years. However, the company’s ROE is not expected to change by much despite the higher expected payout ratio.

Summary

In total, we are pretty happy with AIA Engineering’s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.