Olectra Greentech (NSE: OLECTRA) had a strong run in the equity market with its stock rising significantly 91% in the past three months. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . Specifically, we have decided to study the ROE of Olectra Greentech in this article.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
See our latest review for Olectra Greentech
How do you calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Olectra Greentech’s ROE is:
2.0% = ₹ 145m ₹ 7.4b (Based on the last twelve months up to June 2021).
The “return” is the amount earned after tax over the past twelve months. So this means that for every 1 of its shareholder’s investments, the company generates a profit of ₹ 0.02.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. We now need to assess the profits that the company is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the company. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Olectra Greentech’s 2.0% profit growth and ROE
It’s pretty clear that Olectra Greentech’s ROE is rather low. Even compared to the industry’s average ROE of 7.7%, the company’s ROE is pretty dismal. Despite this, Olectra Greentech has been able to significantly increase its bottom line, at a rate of 25% over the past five years. We believe that there could be other aspects that positively influence the company’s profit growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout rate.
We then compared the net income growth of Olectra Greentech with the industry and we are delighted to see that the growth number of the company is higher compared to the industry which has a growth rate of 4, 6% over the same period.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. Is Olectra Greentech just valued over other companies? These 3 evaluation measures could help you decide.
Is Olectra Greentech Using Its Profits Effectively?
Olectra Greentech does not pay any dividends to its shareholders, which means the company has reinvested all of its profits in the business. This is probably what explains the high number of profit growth discussed above.
Overall, we think Electra Greentech certainly has some positive factors to consider. With a high reinvestment rate, but a low ROE, the company has managed to see considerable growth in profits. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. You can see the 2 risks we have identified for Olectra Greentech by visiting our risk dashboard for free on our platform here.
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