Are Strong Financial Prospects The Force That Is Driving The Momentum In Jash Engineering Limited’s NSE:JASH) Stock?

Jash Engineering (NSE:JASH) has had a great run on the share market with its stock up by a significant 38% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Jash Engineering’s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Jash Engineering

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Jash Engineering is:

17% = ₹318m ÷ ₹1.9b (Based on the trailing twelve months to June 2022).

The ‘return’ is the profit over the last twelve months. That means that for every ₹1 worth of shareholders’ equity, the company generated ₹0.17 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

A Side By Side comparison of Jash Engineering’s Earnings Growth And 17% ROE

At first glance, Jash Engineering seems to have a decent ROE. Further, the company’s ROE compares quite favorably to the industry average of 13%. Probably as a result of this, Jash Engineering was able to see an impressive net income growth of 42% over the last five years. We reckon that there could also be other factors at play here. Such as – high earnings retention or an efficient management in place.

As a next step, we compared Jash Engineering’s 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%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Jash Engineering fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jash Engineering Using Its Retained Earnings Effectively?

Jash Engineering’s three-year median payout ratio to shareholders is 13%, which is quite low. This implies that the company is retaining 87% 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.

Besides, Jash Engineering has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Jash Engineering’s performance has been quite good. 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 substantial growth in its earnings. 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for Jash Engineering.

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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.