Powergrid Infrastructure Investment Trust (NSE:PGINVIT) Stock’s Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

Powergrid Infrastructure Investment Trust (NSE:PGINVIT) has had a rough month with its share price down 4.6%. However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Powergrid Infrastructure Investment Trust’s ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Our analysis indicates that PGINVIT is potentially undervalued!

How To Calculate Return On Equity?

ROE 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 Powergrid Infrastructure Investment Trust is:

5.6% = ₹5.6b ÷ ₹99b (Based on the trailing twelve months to June 2022).

The ‘return’ is the profit over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.06 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. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Powergrid Infrastructure Investment Trust’s Earnings Growth And 5.6% ROE

As you can see, Powergrid Infrastructure Investment Trust’s ROE looks pretty weak. An industry comparison shows that the company’s ROE is not much different from the industry average of 6.2% either. Moreover, we are quite pleased to see that Powergrid Infrastructure Investment Trust’s net income grew significantly at a rate of 28% over the last five years. Considering the low ROE, it is quite possible that there might also be some other aspects that are positively influencing the company’s earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Powergrid Infrastructure Investment Trust’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 8.6%.

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. If you’re wondering about Powergrid Infrastructure Investment Trust’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Powergrid Infrastructure Investment Trust Efficiently Re-investing Its Profits?

The three-year median payout ratio for Powergrid Infrastructure Investment Trust is 40%, which is moderately low. The company is retaining the remaining 60%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Powergrid Infrastructure Investment Trust is reinvesting its earnings efficiently.

Along with seeing a growth in earnings, Powergrid Infrastructure Investment Trust only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

Overall, we feel that Powergrid Infrastructure Investment Trust certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 2 risks we have identified for Powergrid Infrastructure Investment Trust by visiting our risks dashboard for free on our platform here.

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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.