Automobiles News

Is Banco Products (India) Limited’s (NSE:BANCOINDIA) Stock Price Struggling As A Result Of Its Mixed Financials?

[ad_1]

It is hard to get excited after looking at Banco Products (India)’s (NSE:BANCOINDIA) recent performance, when its stock has declined 6.1% over the past three months. It is possible that the markets have ignored the company’s differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company’s financial performance. Particularly, we will be paying attention to Banco Products (India)’s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Banco Products (India)

How Is ROE Calculated?

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 Banco Products (India) is:

15% = ₹1.1b ÷ ₹7.7b (Based on the trailing twelve months to December 2020).

The ‘return’ is the profit over the last twelve months. So, this means that for every ₹1 of its shareholder’s investments, the company generates a profit of ₹0.15.

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. 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.

Banco Products (India)’s Earnings Growth And 15% ROE

When you first look at it, Banco Products (India)’s ROE doesn’t look that attractive. However, the fact that the its ROE is quite higher to the industry average of 7.0% doesn’t go unnoticed by us. But seeing Banco Products (India)’s five year net income decline of 2.4% over the past five years, we might rethink that. Remember, the company’s ROE is a bit low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the shrinking earnings.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate 0.8% in the same period, we found that Banco Products (India)’s performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

past-earnings-growth
NSEI:BANCOINDIA Past Earnings Growth May 17th 2021

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. Is Banco Products (India) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Banco Products (India) Making Efficient Use Of Its Profits?

Banco Products (India)’s declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 66% (or a retention ratio of 34%). With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. Our risks dashboard should have the 2 risks we have identified for Banco Products (India).

Additionally, Banco Products (India) has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we have mixed feelings about Banco Products (India). Specifically, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return. Investors may have benefitted, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Until now, we have only just grazed the surface of the company’s past performance by looking at the company’s fundamentals. So it may be worth checking this free detailed graph of Banco Products (India)’s past earnings, as well as revenue and cash flows to get a deeper insight into the company’s performance.

Promoted
If you’re looking to trade Banco Products (India), open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.

This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

[ad_2]

Source link